鐵山公司 (IRM) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Iron Mountain, Incorporated, earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded for replay purposes.

I would now like to turn our presentation over to Mr. Stephen Golden, Director of Investor Relations.

Thank you.

And welcome, everyone, to our fourth quarter 2006 earnings conference call.

As you know, today we'll be discussing our fourth quarter and full year 2006 results as well as our financial outlook for 2007.

After a few brief announcements, I will turn the call over to Richard who will give his state of the Company remarks, and then pass it along to John for the financial review.

This will be followed by Q&A.

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

If you look now at slide two, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2007 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 depreciation and amortization, or OIBDA, and free cash flow before acquisitions and investments, are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

We provide additional information in the reconciliations of these non-GAAP measures to the appropriate GAAP measures as required by Reg G at the Investor Relations page of our website, as well as in today's press release.

With that I would like to introduce Richard Reese, our Chairman and CEO.

Thanks, Stephen, and good morning, welcome to our call.

We recognize with the markets being the way they are, that a lot of people are busy, and we apologize that this call may be a little longer than average.

We typically try to keep our calls to under an hour but this is the day we're also going to provide our guidance for 2007.

So we'll try to keep it moving. 2006 was a great year for Iron Mountain.

It continued to be solid performance both in revenue and cash flow and we came in at the top end of our ranges.

Internal growth rates continued to accelerate which is where we have been investing and with good success, and we continued our expansion of our footprint both in Asia Pacific as well as Europe.

Instead of me talking about the quarterly performance I will leave that to John, and I just want to reflect a little bit and talk to you just -- review how our businesses are doing.

I'll do it pretty much by our segment as we report in our public filings.

Our North American physical business, which is our core foundational business, 71% of our total revenues continued to have a good year.

It is the foundation that the Company's built on but operationally and financially and off of which we have funded and grown the entire business around the globe.

Total revenues for this segment grew 9%.

Internal revenue growth rates were solid at 8% across the board.

Up from a modestly -- from 2005 led by an increase in internal growth rates storage which grew from 7% '05 to 8% in '06.

And as you know, with the flywheel effect of the business, a storage growth rate increase even of 1 percentage point is a significant change in the business.

The North American box business drove the increases in storage revenue growth with both volume increases as well as a positive pricing environment.

Service revenue growth was in line with '05 at 8% and track storage growth, strength in our North American box and our fulfillment businesses more than offset some slightly lower growth rates of our physical data protection business which had posted a very strong service revenue growth in '05 so it was coming off a bad comp.

In our shredding business, had another nice year with internal growth rates in the mid teens.

From a margin perspective the North American physical business segment posted a margin of 28.6%, which is down 40 basis points from the 29 reported in '05, but remember that segment, as we report publicly not only includes the operational, the business itself, it includes all of our corporate overhead.

In fact, most if not all of that margin decrease was related to other corporate spending.

There was modest improvement in the segment gross margin improvements in facility costs, and decreased sales of low-margin products were more than offset with higher energy and labor costs.

This gain in gross margin was reinvested in transportation, management, IT, and marketing.

These investments are designed to drive and support continued long-term revenue growth and I'll speak to this a bit in a minute.

So now let me talk a bit about international physical business which has now grown to be 23% of our revenue as we have continued to build our footprint outside of the U.S. and North America. 2006 was a busy year in that space as we made a lot of moves.

We entered the year having just acquired Pickfords in Australia, New Zealand markets, and we exit the year having established joint ventures bringing us to six new markets in southeast Asia.

In between that we established a national shredding business in the U.K., with two good acquisitions, created joint ventures in India, Poland, Russia, and acquired a nice document management solutions services business in Brazil.

And at the same time bought out the remaining minority interest of our Mexican joint venture operation partners.

In fact, as a result of this -- or after this Mexican buyout we now own 98% of our international revenues and have less than $6 million of minority interest on our balance sheet at year end.

Also since year end we formed new joint venture serving Denmark.

For those that are new to our story, you will recognize that we use a joint venture structure as we expand globally in most cases, not 100%, but most cases, which has proven to be successful for us.

It allows us to enter a market with partners who invest side by side with us and build our business up of scale and learn the local market.

And then over time, we have typically been filing the liquidity for our investors and they have all done really quite well as have we in this strategy.

Total revenue growth international segment was 24%, primarily because of acquisitions but internal growth was also a good positive story here.

Increasing from 3% in '05 to 8% in '06.

This is primarily from a rebound in Europe which had flat growth in '05 because of the addition of the Hayes acquisition, internal growth -- in that a year.

As you remember we bought Hayes and that, in fact, doubled our business over there, and by the time we cycled through and put it into the calculus when you just double the business it's very hard to keep up internal growth rates.

They tend to take a dip and then rebound back up, which is what we're seeing.

IME rebounded nicely '06.

We expect that rebound to continue in '07.

Our Latin America businesses continue to post strong internal growth rates over 20%.

So, internal growth is starting to do better.

As we said in the international front some have always done well, some we've struggled a little bit and we have been investing, and that investment appears to be paying off.

And we continue to believe we'll see strength in '07 and beyond.

While all of the acquisitions I have mentioned are important to our long-term strategy and we did do a significant amount of work on the international front they have put pressure on our margins in that international segment in the near term.

Those, in fact, those acquisitions and all the work and joint ventures we entered in '06 cost us about 230 basis points of margin on the international segment, or about 50 basis points of margin on the total enterprise.

We expect over time to scale and growth in those businesses that they will come back up and help us accrete margin in the long run as we grow.

Aside from the dilutive impact of acquisitions we have been investing in building a management team and sales team particularly in Europe as we continue to drive these businesses to scale and as I said earlier, those investments are paying.

Last as you know on the international front we had a substantial fire in London that destroyed one of our facilities in July of last year.

Fortunately no one was hurt or injured on our staff nor of the London Fire Brigade, but it was significant damage in the building and all the information and records inside burned to the ground.

The fire and the resulting expenses for cleanup, investigations, additional security, et cetera, did impact our results for the year, and John can speak to it differently but basically the fire cost us about 35 basis points in margin last year.

In 2007 as you look forward a little bit we are expecting continued strong internal growth rate momentum in the international front and margin in line with '06 as we continue to expand our global footprint.

So we were likely toll do some other joint venture and other expansion deals that will put short-term pressure in '07, but we'll contribute to our long-term goals of driving margin up over time.

Our last segment is our digital business.

As you know, we operate the digital business on a worldwide basis where as we operate our physical business on a geographic footprint basis.

Digital business, which is our new baby that's growing up about 6% of revenues, it was a good growth year in '06 for the digital segment.

Total revenue growth was more than 23% with internal growth coming in over 16%.

Storage, which is 70% of the revenue segment in the digital business.

The digital business, the other 30% has a significant amount of project work that can and has moved around a lot, but storage is the long-term driver of value in that business, as it is in all of our other information storage businesses.

And so the metric we watch mostly is what's happening in storage, and it's booming.

Internal growth rates for storage are up 37% for the year.

So, we -- as I said, we do have segments of revenue that, in fact, are loading the storage engine and everything else that turned into big projects.

As you know we had a tough comp of a big $10 million project in '05, didn't repeat in '06.

That impacted the service side of that business.

But the strength in the storage is what we look at, and that's booming, and doing well.

The segment also was contribution positive again in '06 as the business continued to build scale and scale is what we need by and large to make that business in line with margins for the rest of our business over time which is what we would expect would happen.

Reported contribution did fall short of our forecasted range because at year end we took a $5.3 million write-off of deferred costs associated with the discontinued software development project which we took in the quarter.

However, absent that charge, the contribution was right in the middle of our expected range.

As we discussed in the past additional segment is comprised of three businesses.

The data protection business, which is the analog to our physical data protection business, the intellectual property management business, and the digital archiving business which is the analog to our physical record storage or box storage business as we call it.

Data protection and intellectual property management, or IPM, represents about 80% of that segment's revenues and they are just doing very well.

They are contribution positive businesses in markets that are doing well and we expect to see good growth and margin accretion as we go forward, in fact, the data protection segment was created primarily out of our own marketing partnerships and then buying out those partnerships with Connect and Live Vault which -- one of which we contribute in 2004 and the other in 2005 we completed those acquisitions.

As we've said before, looking back those have been two very good acquisitions and they are performing well in the business for us.

The challenge of course in our business continues the large digital archive business opportunity.

As you know we focused on that market early, came in for SEC compliant e-mail market and have done well there and we have learned a lot.

What we have learned is storing an enormous amount of information cost effectively is difficult.

And, in fact, that business is break even at best and frankly losing -- still losing money as that product line itself has not reached scale.

We continue to invest in it because the long-term opportunities there are huge and we are building a second generation back-end archive.

We talked about before.

That project is going well and we'll have much lower operating costs and improved capabilities for ourselves and our customers.

We're still not ready to get that to market.

We're working on front-end information, capture applications so that we can take it to the broader corporate market which has now started to -- we're starting to see that market gain some traction primarily after some new legislative and rules changes many of you may have read about the so-called Rule 26 in the U.S., but for the first time within the law and within the rules related to the federal court system, they have defined the E-records as a real record and put some very tight controls around how they must be maintained, held, and operated, and we are starting to see the corporate market that we have talked about for some time, and said it's out in the future, and it still is a bit out in the future but it's coming closer faster and we continue to look forward to attacking that market and continue to invest in that space.

Now let me talk a little bit about, in summary, the business for '06, as I said, really performed as we thought and we're pleased with our performance.

I do want to step back and reiterate a few messages here again for those that may be new to Iron Mountain as we talked about our last investor day and give you a sense of where we are in our life of our company.

As you know, we thought about this business over time, we talk a lot about where we are in our strategy and our lifecycle of developing the business, and I would tell you it's a great time to be at Iron Mountain.

Information protection and storage is more relevant now than it has ever been in my 25 years in the business.

We see tremendous customer pull to provide more services, more features, and more geographies than we frankly currently can keep up with.

Even as working as hard as people are working.

It's a really robust opportunity set, and more than I've ever seen in this 25 years, and, of course, as we've said before, we're biased for growth, we have been investing in growth, and our internal growth rates are continuing to rise.

So the right things are happening.

At the same time, it's a very durable business that we've built on, the physical businesses have got tremendous revenue and momentum characteristics and they are speeding up, not slowing down.

That being said, it's a much bigger business, a much broader business.

We're managing it differently, we're managing it tighter than we ever have before.

Where as in the past if you remember the three-phase strategy, it was about buying companies, it was about integrating companies, and now we have learned that we have to do a lot of things at once.

We continue to do acquisitions, and I should tell you the acquisition pipeline is actually strongest I have seen in a few years.

That's probably because of the capital markets are shaking the trees pretty well and more people are stepping up saying maybe it's time to get out, but we're sorting through and we continue to do that.

We continue to have a good machine that knows how to do that.

But it's a matter of us managing the balance, and we've talked a lot about that.

We talked about that at investor day.

As you realize and you look back at our history, when we tend to focus on something we tend to make it happen.

At one point after we merged with our largest competitor, Pierce Lahey and doubled the business of some years ago we didn't focus on internal growth we focused on margin, and in fact, accreted our margin to a 30% target we set in 2003, but then went about spending some of that because at the same time because we had doubled the business we had not kept up our sales investment at the current rate.

We saw our internal growth rates go down to as low as 6%.

So after we got that integration behind us we started investing, and we have grown internal growth rates steadily since then, and, in fact, storage internal growth rate has been 10% since late 2005, and total internal growth has improved every year since our low watermark in '03.

But it's cost us some through the P&L.

We continue to invest in the P&L in sales and marketing but we're slowing it down and most of it is on the international front in the business, because we now believe we can maintain good strong internal growth rates, and you should know that embedded in our long-term modeling is, in fact, maintaining good strong internal growth rates as well as accreting margin back up to 30%.

I should caution you that will be a back-end process.

And I should caution you that, as you can see from the numbers, we've had a fairly steady decline in margins since 2003.

But it's not due to eroding fundamentals of the business.

It is, in fact, our own conscious decision to invest in increasing the sales and marketing, in increasing the growth rate and in growing our footprint.

The near-term impact of the acquisitions and growing a footprint have a significant margin impact but they will turn and come around in the long term because we have seen this movie before and we know how it will roll out.

But our basic core businesses, particularly in North America and the U.K., that are at scale that deal in box tape and shred and so forth continue to show strength in growth rates as well as our accreting margins.

But I also want to let you know that as we said over and over it will be back end loaded to get to 30%.

We know we have a lot of inefficiencies in our operations.

We have talked about that.

This year we put in a tighter process to manage our march to getting there.

In fact, we have set up -- for the first time we have separated our budgeting process, we've created a baseline budget that includes the right revenue growth rates and margin accretion, so that we know that we can drive our field operation in our business to grow margin.

At the same time we created a secondary investment budget and a team of people and a process to release funds around that to improve the business to invest in the future.

And the gap between margin accretion we actually create and margin accretion we actually report is frankly what we're planning to do, spend to invest a little bit for the future.

So we feel like we have got a good control process to do that and we're going about managing the balance now as we think in '07 flatten out the margins a bit and stop the decline and then over time -- and I'm not promising you what '08 looks like, because we haven't done the planning for '08 but we remain confident we can drive the margins back up over time.

So, we feel pretty good about '07 as we head into the business, I think everybody feels pretty good about their budgets, and the answer is we should feel pretty good, not too good, because they have always got a stretch in them, and that keeps us all on our toes and working hard but the business is doing well from my perspective, as I have said over and over I have not seen the opportunity set as strong as it is now.

We have been adding to and expanding our management team and with a mix of outside people and a mix of changing people, asking people inside to take new roles, and we have announced some of those, and one in particular I want to speak to is that we will soon welcome a new CFO, Brian McKeon, who will become our CFO at the end of April, and you have seen the press release.

Brian joins us from Timberland Company, CPA with about 20 years experience as a finance executive.

Before joining Timberland he spent bout eight years at PepsiCo, and he's had several other executive positions of finance and strategic planning, and, in fact, was at one point Vice President of Finance of the Pepsi-Cola North America division.

He has a BS in accounting from Connecticut and an MBA from Harvard Business school.

So we welcome Brian and we think that Brian will, as we have said before, will help us expand our team in terms of what we need to do next to manage the business tighter, to manage the business to drive margin and deliver this balanced performance.

At the same time John Kenny who has really been running two roles and wearing two hats gets to wear only one, and focus more on the corporate development role which includes both of our M&A operations as well as our real estate.

This is two big areas where we spend the majority of our capital, and we're asking John to take his skill and knowledge of the business and drive capital efficiency out of it and quality out of what we do.

And as you notice when we talk about the balance, we talk about internal growth rate, strategic positioning on one side.

That's what got us here.

But going forward we want to maintain and enhance our strategic position and maintain and keep pushing on internal growth rates but at the same time drive margin up and capital efficiency up, or capital usage down.

That is our strategy that is our goal at any one quarter.

Different things happen, so nothing's a short term plan, but we're putting the resources on those projects, and on those areas of the business so we can get it done.

The other thing we announced I think yesterday, and I'm pleased to tell you we're expanding the Board.

We will officially do that Friday at our Board meeting but Laurie Tucker has agreed to join us as a new member of the Board.

She's currently Senior Vice President of Marketing at Fed Ex Corporation.

She joined them in 1978 as a financial analyst and since then has gained tremendous experience in many facets of the business.

Today she's responsible for developing their marketing strategy, product research and development, brand management, advertising, retail, sponsorship marketing, business alliance, e-commerce, and customer service experience management.

She has a BA and an MBA from the University of Memphis.

If you haven't been listening you would be remiss to not hear what I have said over and over.

Iron Mountain is a much more complex, much more opportunity-rich company.

We expect and believe -- and I'm already seeing that Laurie is going to bring us a lot of knowledge and value of how we sort through those opportunities and how we become a better marketing engine.

Our brand grows every day.

It's getting stronger and stronger.

That just increases our opportunity.

It is now time to really pay a lot of attention to that as we continue to drive to build us an ever bigger, more profitable business.

So we look forward to all those changes which are on the near-term horizon.

With that let me turn it over to John who will get into the numbers for the quarter and into the guidance, then we'll come back and take your questions.

Thanks.

Thank you, Richard.

Let me apologize again for the length of our comments and for the possibility that I might lose lung capacity or lapse into a coughing fit.

Winter came late to New England but it came on like a gangbuster and it embedded in my lungs, and while most people consider that a blessing it could prove to be a problem in me getting through this.

I'm going to move briskly and just stick to the highlights on our slides.

So without further adieu you can all read slide 3.

It's in my agenda and it's typical in most respects other than we're going to talk about guidance for '07 today.

Let's move right on to slide 4 and review the key financial messages for today's call.

Slide 4, as Richard had mentioned, everything is as we expected and as we forecast on our last earnings call in October.

The key messages have changed very little throughout 2006.

Business performed well, and particularly as expected in this quarter.

We had solid revenue performance once again led by strong storage internal growth rate.

Operationally we ad a good quarter.

As strong service revenue and overhead leverage pushed OIBDA to the top of our forecasted range.

As we discussed on our Q3 earnings call, OIBDA included a $10 million gain on the sale of a business, and as Richard mentioned earlier we absorbed a 5.3 -- sale of a building, excuse me, and as Richard mentioned earlier we absorbed a $5.3 million write-off of deferred costs associated with the discontinuation of a software development project.

Finally, our capital expenditures were as planned.

Let's now move on to slide 5 and begin to look at the details.

Slide 5 compares results for this quarter to Q4 of 2005.

The dynamics at work here are basically the same as they have been throughout the first nine months of the year.

As you can see, revenues increased by $72 million or 13%, to $610 million in Q4 2006 compared to Q4 2005.

The revenue story remains a great story, and I will get to that momentarily.

Our gross margin was 54.8% for the quarter, a decrease of 20 basis points compared to the same period last year.

The strategic acquisitions in Europe and Australia, New Zealand, and the July fire in London continued to pressure gross margins in the fourth quarter by 40 basis points and 65 basis points respectively.

These factors masked the positive impacts of strong revenue growth, stable service gross margins, higher recycled paper prices, and improved transportation margins due to lower fuel costs for the fleet in North America.

Total energy costs as a percent of revenue were modestly accretive year-over-year.

As Richard discussed in his comments, we have completed several acquisitions, primarily in our international segment, that have reduced our gross margins throughout 2006.

Although we expect all of these acquisitions to improve their margins as they mature, some, such as the shredding businesses in the U.K., and the DMS business in Brazil will never reach the gross margins of the storage business due to their higher service component.

The trade-off here is that these businesses require much less capital than our physical storage businesses do.

Finally, Pickford's is involved in a significant real-estate consolidation program which was underway at the time of the acquisition.

They will accrete margins once the program is complete.

Again, let me emphasize we expect all of these businesses to increase their gross margins over time.

Operating income before depreciation and amortization, or OIBDA, was $169 million, or 27.7% of revenues for the fourth quarter.

Remember, this includes a $10 million gain on the sale of real estate in Europe.

Absent this gain, OIBDA would have been $159 million, or 26.1% of revenues for the quarter.

Also included in the fourth quarter results was a $5.3 million write-off of deferred costs.

This hit mostly IT labor costs.

This was part of a broader decision to focus more time and resources on our second-generation archives and the development of new front end records gathering applications.

The write-off represented 90 basis points of OIBDA margin in the quarter.

Absent these factors, and the impact of the London fire we've discussed, we saw improvements in our underlying OIBDA margin on a year-over-year basis.

Strong revenue growth led to modest overhead leverage and receivables collections were very strong, causing a year-over-year decrease in bad debt expense.

Our customer facing expenses as a percent of revenues were flat year-over-year as we have now passed the anniversary of the major sales force ramp in late 2005.

Depreciation at $48 million and amortization at $6 million for the quarter were both in line with expectations.

Depreciation will rise modestly over the next few quarters, as most of our CapEx spending occurred in the second half of last year.

I will speak more to this point in a few minutes.

Moving to slide 6, you can see that interest is $51 million for the quarter compared to $46 million for the fourth quarter of last year.

And reflects our $200 million high-yield offering completed in Q3, and the private placement transactions completed in Q4.

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

In Q4 2006, we had other income of $3 million, or $0.01 per diluted share, versus other expense of $3 million or $0.01 per diluted share in Q4 2005.

We had net gains related to foreign currency exchange rate fluctuations as we mark our inter-company debt to market in Q4 2006, versus net losses in 2005.

Now slides 7 and 8 are the year to date versions of the two slides we have just reviewed.

Generally speaking, the year-to-date results follow the consistent dynamics at work throughout the year.

Strong revenue growth led by storage internal growth, underlying gross margins are up slightly year-over-year, absent the dilutive impact of recent acquisitions and costs associated with the fire.

The year-over-year impact of energy costs in 2006 was about 15 basis points.

The Live Vault acquisition, along with our customer facing and productivity investments, drove the higher overhead in 2006.

Costs associated with the London fire and the IT write-off impacted full-year margins.

D&A and interest were as expected.

And finally, in 2006 we had other income of $12 million or $0.03 per diluted share, versus other expense of $6 million or $0.02 per diluted share in 2005.

Now let's move to slide 9.

These are the key revenue messages for the quarter.

Revenue growth remains strong at 13% and the growth dynamics that we saw throughout the first three-quarters of 2006 continued into the fourth quarter.

As expected, the core physical businesses in North America had internal revenue growth rates in the high single digits and the faster growing international and digital segments increased our growth rate to 10% overall.

The balance was due to acquisitions.

For the fifth consecutive quarter, storage internal growth was 10% or better.

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

As important is the make-up of that 10% internal growth rate, it is being driven by strong internal growth in the North America box business.

For the fifth quarter in a row, the storage revenue internal growth rate for that business was 8%, a level not seen since 20001.

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

The service revenue internal growth rate for the quarter was 10% as we saw strong special project revenues in North America, an increase in destruction activity, and continued strength in our fulfillment business.

Recycled paper prices remained high and contributed to the improved service internal revenue growth rate.

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

Let's now turn to slide 10, total revenue growth rates.

This slide gives you a view of our total revenue growth rate 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 10%, and acquisitions, primarily the strategic acquisitions we've already discussed, contributed 2 percentage points to overall growth.

Finally, favorable year-over-year foreign currency fluctuations improved our total revenue growth by about 1 percentage point.

On a year-to-date basis, internal growth accounts for 9 of the 13 percentage points of overall revenue growth with acquisitions contributing the balance.

Foreign currency fluctuations had virtually no impact on our full year-over-year revenue growth.

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 which we originally forecasted at our 2005 investor day.

Storage growth has been strong all year at 10%.

Again, driven primarily by solid revenue performance in our North America physical businesses.

Core services track storage for the year and were helped by year-over-year improvements in our digital and international segments.

Complementary revenue growth was strong at 13% for reasons we have already discussed.

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

In 2006, we had capital expenditures totaling $371 million, which includes $52 million in real estate spending.

Those amounts were well within their respected forecasted ranges.

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

Many of our real estate expenditures were completed in the second half of the year.

As with any real estate portfolio as large as ours, dispositions of buildings tend to be a somewhat recurring event.

In 2006 we had net proceeds of approximately 15 million from the disposition of real estate.

Continuing on, slide 13 looks at our year to date free cash flow for 2006, compared to the same period for 2005.

For 2006, the business was essentially free cash flow neutral before acquisitions.

Cash flows from operations before changes in working capital increased 5% to $396 million in 2006.

Working capital was a use of $22 million for the year, due primarily to the decrease in accounts payable and other accrued expenses.

As a result, cash flows from operating activities were flat compared to 2005.

The year-over-year decrease in free cash flows before acquisitions was due almost entirely to the $120 million net increase in our CapEx.

Now let's take a look at slide 14.

Here you can see our standard debt statistics.

All of these statistics are presented pro forma for two events.

The Q1 2007 sale of 225 million euro dollars of our 6.75 senior subordinated notes due in the year 2018.

The notes were priced at 98.99% of par to yield 6.875%.

The other thing I referred to which actually happened during the fourth quarter, were of the private placement of 50 million U.S. dollars of 8% senior subordinated notes, and 30 million euro dollars of 6.75% senior subordinated notes.

Both of these have a maturity of 2018.

We used the net proceeds from these transactions 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 was 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 appropriately with our assets and the highly recurring and predictable revenue streams those assets generate.

The successful completion of these offerings and the subsequent use of proceeds gave us improved liquidity, extended our weighted average maturity, increased our percentage of fixed rate debt, and began the process of naturally hedging on a long-term basis our growing euro-denominated investments.

Now please turn to slide 15, the guidance section.

Before we begin to look at our 2007 guidance, I want to remind you of the long-term financial goals we have presented at our investor day back in October.

Embedded in the strategic themes that Bob Brennan laid out in his presentation are the following financial targets.

A five-year internal revenue growth rate compound annually at 7 to 11%.

OIBDA margins of 30% in 2011, and lastly, CapEx improving from 16% of revenues to 13% of revenues by 2011.

These goals remain unchanged as does my caveat that these targets are based on our current mix of business.

We could enter an adjacent business with lower margins that fits our recurring revenue model and addresses customers' information protection and storage needs.

Typically, these businesses require less capital and therefore generate acceptable returns.

Should our business mix shift materially, we would see it as our responsibility to come back to you, tell you what we are doing and revise our targets accordingly.

Let's look at slide 16.

As we head into 2007, the revenue growth outlook remains strong.

I will break out the components of our expected revenue growth in the next two slides.

Our 2007 margin will likely be flat compared to 2006.

As Richard said earlier, the margin accretion to 30% will not be linear.

We still have 30% of the target based on the current revenue mix, and the margin accretion opportunities we see are still as I described them at our investor day.

You also heard Richard describe the new budget process we have implemented.

We budget the business -- base business to acceptable growth and margin targets and based on those results determine our level of investment affordability for the year.

Funding for these growth efficiency and infrastructure initiatives is embedded in our operating and capital budgets and reflected in the guidance put forth today.

We will release funds against these investments based on the performance of the business throughout the year.

Also, because we're talking about basis points of margin accretion, it should be noted that there are a number of exogenous factors that are outside of our control that could affect our results on the margin no pun intended.

Allow me to site just two examples.

A 10% change in recycle paper prices, and recycled paper is 100% margin byproduct of our business.

That 10% move in that -- in those prices from our current assumptions would result in a 15 basis point swing in our margin either up or down.

Likewise if the British pound, our largest foreign currency, moves 10% our margins would move 10 basis points.

Even though we have made what we believe to be reasonable assumptions with respect to these factors, these two alone could create a 50 basis points range around our expected results.

Broadly speaking, the drivers and components of capital spending don't change quickly in our business so the make-up of our 2007 CapEx closely mirrors that of our 2006 CapEx.

As a reminder, more than two-thirds of our CapEx is purely for capacity and less than 15% is for maintenance CapEx.

That means that all the action takes place with respect to the remaining approximately 20% which covers acquisition restructuring and the initiatives we have discussed.

The next two slides show two different cuts of our expected internal revenue growth for 2007.

First, by reporting segment and then by revenue type.

Please turn now to slide 17.

These are our expected internal revenue growth rates for our three segments.

For our North American physical segment, it's steady as she goes.

We have a range of 7 to 9% internal growth compared to the 8% we posted in 2006.

We are biased toward the upper half of this range as we expect modest but steady improvement in the storage internal growth rate.

In the international segment we expect 9 to 12% growth compared to 8% growth we posted in 2006, primarily due to improved growth rates in Europe.

While the increase in the storage growth rate in Europe will be modest, service revenue growth rates are expected to show more significant improvement.

We are looking for mid teens growth out of our Asia Pacific business as it enters our internal growth revenue base and our Latin-American business is expected to remain our fastest growing region.

In our digital segment we are expecting 12% to 14% growth compared to the 16% we posted in 2006.

Combined, the data protection and intellectual property management pieces of our digital segment are expected to grow more than 20% in 2007.

However, as we have discussed growth in digital archiving storage revenues are expected to be roughly flat.

On a consolidated basis we are expecting internal revenue growth to be between 8 and 10% compared to 9% in 2006 and we are biased to the upper half of that range.

Moving now to slide 18, here you can see our revenue growth expectations for storage, core service, and complementary service compared to our actual 2006 results.

The momentum that we have seen over the past year in North America storage growth is continuing into 2007, along with improvements in Europe and along with improvements in Europe would normally justify a slightly higher range.

The impact of flat storage revenues in our digital archiving business offsets that somewhat.

The SEC compliant e-mail archiving market was white hot in '05 leading to very high storage internal growth rates, as we've discussed this market which was initially fueled by a spate of litigation has cooled off considerably.

Core storage revenue growth should continue to track storage growth and we expect shredding to have another solid year.

Our outlook for complementary revenue growth is strong but it is the most volatile revenue stream in our portfolio and therefore carries the widest range in our guidance.

Finally, since we completed all of our significant acquisitions early in 2006, the incremental revenues in 2007 represent less than 1% growth, and the same is true for the impact of foreign currency fluctuation based on the rates we have assumed for our guidance.

So to get to the punchline, let's look at slide 19.

Here's our guidance for Q1 and for the full year 2007.

We expect revenues for the full year to be in the range of $2.53 billion to $2.6 billion.

Operating income should be between $427 million and $452 million, and depreciation and amortization should be between $223 million and $228 million.

That implies OIBDA for the year of between $650 million and $680 million.

While the margin range suggested by the revenue and OIBDA ranges is nearly 200 basis points wide, we expect to finish the year roughly flat to 2006, excluding the gain on the sale of real estate.

CapEx for the year is expected to be in the range of $390 million to $420 million.

And as I said earlier, internal revenue growth should be between 8% and 10%.

You can see the first quarter guidance as well.

Keep in mind that margins can move around from quarter to quarter, and that margins in the first quarter are historically the lowest of the year, due primarily to a higher mix of lower margin service revenues, seasonally higher energy costs, and fully loaded payroll taxes and incentive compensation expense.

We will still be feeling the dilutive impact of the shredding businesses in the U.K. and the DMS business in Europe as those acquisitions were completed in the first half of 2006 and lastly there's still some residual fire expenses coming through in the first quarter.

Recall that our European business has a 60-day lag, so it's first quarter ended at the end of January.

Finally, slide 20 shows you our 2007 expectations for P&L line items below the OIBDA line.

There are two things of note here on this slide.

First, we have received an insurance payment related to the London fire of approximately $17 million.

That will be reflected in our Q1 results.

Of that amount, approximately $9 million or $0.02 per diluted share relates to the business interruption portion of our claim and will be reported as other income on our P&L.

The remaining $8 million relates to our property claims and will be reported as a source of cash in the investing section of our cash flow statement.

The second item of note here is that we are assuming a 43% effective tax rate for 2007 which is slightly higher than our historical rate.

As you know, we have been consuming our NOLs over the past several years, and we currently have about $173 million left for federal tax purposes.

We expect to consume substantially all of that NOL in 2007.

Late in 2006 we established an international treasury sensor in Switzerland to centralize our international treasury function and serve as our in-house bank for our European operations and eventually for all of our international subsidiaries with the exception of Canada.

This and other business strategies that we are implementing have positive tax implications, and while certain one-time costs of implementation will increase our effective rate in 2007, we expect our effective rate to be below 40% beginning in 2008.

More importantly, these strategies generate significant annual cash tax savings.

Thank you.

With that we will now open the phones to take your questions.

Operator.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Michael Morin with Merrill Lynch.

I was wondering if you could comment on the Pickford's project, when you think that that might be completed?

That -- the realty consolidation is winding down this year.

Yes, and the other big cost, was we had to get off of the accounting and corporate services platform of the selling company which then caused us to spend a lot of money and energy both down there and here to install major systems and do conversions and ramp up a staff, and that was done and done well by the end of the year.

Okay.

Then the big project on the digital side that you had just over a year ago, have you had anything comparable in nature but perhaps not in size over the past year?

Yes, a lot of small ones, but not -- but nothing of that scale, and as we said, that project was related to doing back file conversions of e-mail, taking back-up tapes, crack them apart and then build them in the archive.

What happened under pressure and just under the desire to get an archive built you saw a real spike in that kind of revenue projects, and general revenue in that space in general.

That is tailing off over time as people actually build their archives and get their back file converted that will tail off and has been tailing off.

We have been talking about that for some time.

That particular one was just extraordinarily large, and we haven't seen anything of that scale and probably won't.

Okay.

Then just finally, I think Recall, when they announced their results maybe a week or so ago, mentioned they made some pretty significant customer wins.

Are these customers of yours that you have lost, by any chance?

Well, I think they mentioned one, and we don't really want to get into customer names, but the one they mentioned is -- that I'm aware of is a customer that is currently ours, and we and they have chosen not to stay together.

It will take them a few years for that to unwind, but that's happening.

That's just normal course of business or is there anything--?

Our termination rate of customers is at an all-time low, and we have been saying for sometime that we expected to the go up, and we do, and it will, and that is because of -- we are being more disciplined about how we price.

Great.

Thanks very much.

Your next question comes from the line of David Gold with Sidoti.

Please proceed.

Good morning.

Richard, on the last one, on price, curious there if you can talk about a couple of things.

Directionally at the analyst day there was some comment that '07 would be a year of positive contribution there and was hoping you could update us on that a little bit now if the plans are out.

You are talking about positive contribution on--?

From price?

From price, right.

The easiest aspect of price to speak about is in the North America physical business where we have a lot of longitudinal data around volume and internal growth, and there we saw a little over a 1 point of price as volume was around 7 and storage internal growth rate slightly exceeded 8.

Thanks.

And then one more for you, John.

You talked about -- and looking in my model, the CapEx numbers directionally were a little higher, and you talked about some of that, but curious, I guess Richard commented about a more formalized or different control process that you have for the discretionary portion.

Just curious if you could give us a little more color on that?

Yes, the -- we have a desire to invest because the market forces are so compelling, and so we're investing in the area of customer facing investments.

We're also investing in infrastructure to support a global organization.

Just to give you -- and many of those investments will have the effect of helping us gain efficiency and margin in the business.

Let me just cite a couple of them.

We're rolling Oracle out.

We obviously successfully did that in our new Australia New Zealand operation.

We are on the way to doing that in the U.K. and then subsequently we'll proceed to the continent of Europe.

We're implementing an enhanced purchasing system in our North America operations.

We're investing in automated time and attendance capture to manage labor better.

We're investing in software and other things to enhance transportation and chain of custody, and so we have a very thoughtful process for causing those kinds of initiatives to compete for the capital that is not required to maintain or grow the business.

Again, as we said, we developed a view of affordability because the underlying businesses particularly established businesses do accrete margin, and we try to meter those investments in to show steady results and that's really all the art of management in a complex business that has lots of opportunities.

If I might, just one more.

With the new customer, the large one that you had mentioned at the analyst day, has that move in been completed?

That was one of our most successfully executed projects ever.

By the way, it it consumed late in the year in excess of 10 million in capital to do it.

It was a mobilization that this customer, which is an organization of considerable scale, was tremendously impressed with, and we're going to have a wonderful long-term relationship with that customer as a result.

But operationally, we have to take our hats off to our field organization.

They did a great job.

Great job.

So the move is complete.

Yes.

So you saw in Q4 some expenses and a lot of capital, the revenue is starting to come in.

Got you.

Thank you both.

Your next question comes from the line of Andrew Steinerman with Bear Stearns.

Please proceed.

Hi there.

John, you gave a healthy list of some of those discretionary projects that we're investing in, 20% of CapEx.

What type time frame do you think of when you're looking for your target return on capital?

For those types of projects.

Yes, in less than three years some of them a year, some of them two, some of them three.

But less than three years by and large.

Okay.

And, Richard, you mentioned e-mail archiving is still losing money here but we want to invest, we're going to next stage platform for Eva.

How long would you be willing to tolerate losses in e-mail archiving?

If it was still losing money in a couple of years would that be just too much?

I have no idea, Andrew.

I wouldn't tell if you I did.

All right.

Well, just make it work anyhow.

Yes, I know.

Thank you very much.

By the way, Andrew, just to tell you, I'm not worried about that issue.

That business is going to do well.

I am not -- we got work to do, but I have a lot of confidence in it.

Thank you very much.

It's not something I lay awake thinking about.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Sam Taylor] with Portland Health Group.

Please proceed.

Your guidance suggests that free cash flow in 2007 will be approximately 0 again.

Can you give longer term guidance about when you expect free cash flow to turn meaningfully positive?

Actually, we would -- our best guess on '07 is 0 to 50 million, so we do think we'll be in positive territory.

What those impact our cash flow going forward is taxes, which will begin in '08, but we would expect to remain in positive territory.

What's important to note is that we are growing our way into meaningful amount of debt capacity.

I mean, our leverage is -- our consolidated leverage is about 4.4 and we haven't seen those levels since before the Pierce Lahey acquisition.

Sure, but presumably there comes a point when you will want to be paying down that debt so it's important to understand when free cash flow will turn meaningfully positive.

My guess is that to drive good returns on equity here we're likely to maintain leverage at or above four times for the indefinite future.

From our perspective, you understand, free cash flow is a -- an important metric.

We keep an eye on it.

We have been free cash flow positive for some years, this year we dipped below.

But that's all about investment rate.

We can manage that in any form or fashion that we want.

It's about growth rate what the Company can internally fund.

It's a capital intensive business.

Right now we're increasing growth rate.

We want higher free cash flow, let growth rate drop a point 1.5 points, it gushes cash.

You get a point at which you push growth rate up and you have to add cash.

We are right about at -- close to that point, rate about on the margin for that right now.

And we continue to build a strategy of building a bigger and bigger engine.

You should also know that it would not be our long-term goal to pay down and delever the Company to 0.

We speak and believe in managing prudent leverage and managing in a safe fashion but keeping the business levered because through good prudent financial leverage, you drive good return on equity, and that still is our long term and is our current goal.

It's what we try to do.

But even if you don't want free cash flow to pay down debt you presumably might want it to pay dividends.

So still it's important to understand when--?

I understand.

Like I say, we just separate those issues.

Free cash flow is a metric we watch and, you know, as I said, if we wanted at any point in time we can slow it down.

Thank you.

Yes.

Having said that by the way, at the current growth rate it will take at couple of years to overcome the tax hits that come in but our models say it will still start gushing free cash flow anyway.

Okay.

Thanks.

Yes.

Your next question comes from the line of [Scott Freeberger] with CIBC World Markets.

Please proceed.

Hi, good morning.

This is [Inaudible] calling for Scott.

Couple of questions.

First, you mentioned that price is going to be like 1 to 2% maybe for next year.

At what point is pricing going to play a more important role, if not next year, then is it in three years or in five years, or even longer?

We didn't make a forward-looking statement on price, but as concerns North American business, year one to two is probably not a bad guess.

We think in this inflationary environment 2% price that's sustainable is good and a tremendous driver of value.

In addition to that, we're just reluctant to speak about forward guidance on price.

We'll be happy to tell you what was going on, but we don't always know, by the way.

All right.

Okay.

Thanks.

Next question is about the CapEx.

CapEx guidance in '07 I see a lot.

Will we still spending on [Inaudible] and about less than 15% on maintenance.

So this leaves digital -- CapEx on digital less than 10%.

Am I right?

Well, actually, when we speak about capacity, and the fact that a super majority of our CapEx is purely for capacity, that means physical buildings, physical shelving systems and building outfitting.

It also means storage devices.

For digital.

For digital.

So most of the digital spend, you know, for growth is imbedded in that two-thirds of our CapEx.

And can you give us more detail on basically--?

No, we don't -- we're not prepared at this point to break CapEx down into -- by product line.

All right.

And so on the digital, do you think you're going to develop it more internally or more by acquisitions as you did some acquisitions Live Vault and Connected, are you going to continue on that way?

We have what we call a bill by partner strategy.

Partnership?

Well, things that are core to us, and absolutely core, we will build it, if that's the most cost-effective way.

Things that are around our peripheral or interesting, or things we want to look at, we partner for, and things that you can't build and get to any other way we'll acquire.

And so we look at all three of those as tools, and so, yes, we may and will likely do more acquisitions in initial space over time, but we also doing some internal development and of course we will continue the partner route.

We have some good ones now.

There's some other ones we think will come forth.

I want to make the point, that not only were Connected and Live Vault really excellent acquisitions, but our total revenue in the digital backup segment is probably of equal parts.

That is to say, acquired and internally generated, because the growth rates in those businesses before we bought them, through our own sales force were robust, which has led to us buy them.

Then since we have bought them they have been very robust as well.

Operator, other questions?

Your next question comes from the line of Edward Atorino with Benchmark Company.

Hi.

You sort of answered it, but would you just maybe -- margins flat in '07.

What are sort of the key pressures there given the volume?

Was it mix?

Change in mix basically that's--?

Well, we've got a variety of pressures.

The acquisitions and mix, do that, but even having said all that, we budget at the business units we believe will produce some margin accretion.

We are going to choose through our project management office investment process, we are going to choose to spend down some of it.

Got you.

When we do that, we -- when you invest in some of these projects for future improvement you have a margin impact, in other words, you got expenses, then you get some CapEx drag along.

Understand.

Thanks very much. [Audio difficulties]

Excuse me, somebody has cut in.

We can hear your conversation, operator.

Anything else?

Operator, do you have any others?

I think we're done.

Bye.

Thanks.

We appreciate the long schedule that you have been with us today.

Sounds like we've got some cross-talk on the line.

Thank you for coming.

As I said, it was good year.

We look forward to another good year in '07 as this business chugs along.

The market is getting stronger.

Opportunity set is getting broader, our brand is getting stronger and better and we're strengthening our team and our company, so those that are long-term investors with us, which are the ones we appreciate the most, should feel good about the progress we as a company are making and what we see in the future.

I should tell that you John will be at the R. W. Baird business solutions conference here in Boston today on the stage at 12:50.

For those that have been listening, don't bother, he is not going to say anything he didn't say today, that, I can assure you of, but he is going to go over and support that conference, and then we are actually going to some Board meetings right after that.

Thank you again, and we look forward to seeing some of you on the road throughout the year, and to your continued confidence and we will try to continue performing for you.

Have a good day.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect.

Have a good day.