鐵山公司 (IRM) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Iron Mountain Incorporated earnings conference call.

My name is Annie, and I'll be your coordinator for today.

We will be conducting a question and answer succession towards end of this conference.

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr.

Stephen Golden, Director of Investor Relations.

Please proceed sir.

Thank you, and welcome to our 2007 earnings conference call.

After my announcements this morning, Richard Reese will give remarks and turn the call over to John Kenny for the financial portion of this conference call.

This will be followed by our usual Q&A.

For our custom, we have a user controlled slide presentation on the investor relations page of our website at www.ironmountain.com.

If you'll refer now to slide No.

2, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for Q2 and the balance of 2007's financial performance.

All forward looking statements are subject to risks and uncertainties.

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

As you know, operating income before D and A or OIBDA and free cash flow before acquisitions and discretionary investments are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

We provide additional information and the reconciliation of these of these non-GAAP measures to the appropriate GAAP measures as required by the (inaudible) at the investor relations page of our website as well as in today's press release.

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

Good morning, everyone, Stephen, and thank you, everyone, for joining us today.

We really don't have a lot of significant messages to talk about.

But a few interesting things I'd like to cover hopefully.

Q1 as you see by the numbers was a good quarter.

We're off to a strong start.

At all levels revenue as well as bottom line.

I caution you we will come in we think for the year as we're telling you but we are also today raising our guidance based on our outlook for the year based upon the quarter as well as some acquisitions that we have announced and that I'm talking about here today a little bit.

By and large the business is running pretty well and we're pleased where we are.

Some of the performance for the quarter, ahead of plan, on the bottom line is related to revenue of being stronger.

And some of it the related to good controls and some delays of initiatives just the timing of the starting.

You'll also see that our CapEx was a little low and we will come in line for the forecast for the year and as we wrap up some of the CapEx and some of the initiatives that has a drag along effect on expenses.

Nonetheless it was a good quarter and we think it bodes well for the year because we're off to a good start and it always makes us feel good.

Other things going on, the other message that I'll leave you with and tell your about in the business is we are seeing acquisition activity.

We're not out whipping the market, actually the market is whipping itself up.

And we've made some interesting acquisitions and we have expect this might be a little stronger than average year and I'll talk a little about that as we go.

Before I get into details, we've announced a plan I guess maybe a year ago to transition our organization some and where John Kenny who has been our CFO for a long time is taking a new role and we announced a process and a search and in fact the candidate, Brian McKeon has joined us and is now our new Executive Vice President and Chief Financial Officer.

He's only been with us since Monday the 23rd so we decided not to throw him to the wolves yet.

But to remind you, Brian is CPA, nearly 20 years experience as a financial professional comes to us directly from the Timberland Company, which is a global footwear and apparel company where he was their CFO for seven years.

Before that he had eight years at PepsiCo where he held several executive positions including finance and strategic planning and so forth.

His last job there being Vice President, Finance of PepsiCo North America.

He has BS in accounting from the University of Connecticut and an MBA from that awful place Harvard University.

I make my side comments we have a lot of us from the same place.

Brian will report or does report directly to me and will be responsible for the full range of finance activities including accounting, financial planning and analysis, treasury, legal, corporate planning and investors relations.

Although, we're not going to throw him to the wolves I am going to ask him just to make a couple of comments partly so you can recognize his voice and at the end of our presentation today I'm going to give you some sense of where a variety of us will be over the next two or three months to give you exposure to Brian, John, myself, Bob Brennan and so forth.

So Brian, why don't you say a few words.

Thanks Richard.

I'm thrilled to be joining a company with such great potential and really looking forward to helping build on the track record and success that you and John have established and look forward to meeting investors out on the road over the next several months.

Thanks Brian.

We've said but to restate John Kenney is going to do his typical MP&A and go through the questions.

But for those that haven't paid attention, what he is going to be doing for us, John is staying on in a new role.

He's done a tremendous amount of work for us as our CEO.

Before that, he ran our corporate development organization and before that he actually ran one of our business units.

He's deep in knowledge in the business.

And John is really going to take a new role.

He is Executive Vice President of Corporate Development.

Kind of responsible for the Strategy and execution of two functions that we think are even more critical in the future.

One is the development role, which is more than M&A but as we employ capital in a variety of ways to expand our business, as well as the real estate.

You may not realize how big a portfolio of real estate we manage and own, but it is significant and getting more significant all the time and getting more complex all the time as we expand in a global way and managing real estate outside of North America is more complex and fraught with more issues and by the way in many cases with a lot of opportunity for helping us really increase value in the country.

And it is a place where we have invested significant capital and expect to continue doing so.

So, we've asked John to take that role and look forward and I think he's kind of excited about transitioning and he's been lately running two roles and trying to get back to one role instead of two at a time.

So John will continue to report directly to me and I look forward for him to be my partner going forward.

Before John does talk to you let me just give you a little overview of the quarter.

You can read the numbers but it was a solid quarter, good and solid internal growth up 9% right in the middle of our forecasted range and our revenue and dollars exceeded the top end of our guidance on strong revenue as well as good expense control for the quarter.

At 10%, we had slightly higher than expected service revenue, which came from good (inaudible) which came from selling and delivery fulfillment and software license sales.

We exceeded our targets because of the control and timing of expenses but I do warn you that as I said, a lot of these projects will fold in over time during the year.

That income was up $35 million up or $0.17 a share, up 27% versus the same quarter last year and John will get to the details.

The other highlight for the quarter was we had a significant amount of financing activity and you're going to hear about that from John and Jeff Lawrence our treasurer and explain to you how we've done a lot to strengthen our balance sheet and to build in some financial flexibility as well as good currency protection in a natural way of hedging our foreign exposure risks as we get larger and larger outside the U.S.

and outside the dollars.

Based on a good quarter performance we think the year is off to a good start.

That being said, I want to caution all of you that bill models and print things not to extrapolate off these results.

The year will be the year.

I think our raised guidance and our forecast are fair and reasonable.

And we plan to operate within them.

So don't get too awfully excited.

But as I said it was a good quarter and we're feeling good about how the business is running.

When I opened up, I said that this was a year of acquisitions, of strong acquisitions.

There are some change in the acquisition market out there.

Particularly North America.

We are seeing more activity of people interested in selling their businesses and this is occurring without us at least beating the bushes.

I think it's driven a lot by capital availability in the markets in general and frankly, lower cost debt out there causing people to rethink maybe this is a good time to sell their businesses.

In addition to that, the cost of doing business in our space is rising or favoring those with more scale which is a trend we've said over a long time will happen and is happening out there and we see probably kind of another wave of some level of consolidation.

There are enormous numbers still of competitors in our industry and we think some will choose to exit.

And we are seeing that activity now.

We'll expect '07 based upon deals done and announced to be higher than the last two or three years in terms of acquisition span.

It won't be an all time record year but it will be higher than the last two or three years.

As you know, we didn't forecast acquisitions then but I did want to give you some signal to let you know.

That doesn't mean we've changed our strategy.

It doesn't mean we are focusing on these deals, but they are good financial opportunities and we always like to take advantage of those when they come around.

We recently have signed and closed several acquisitions that impacted Q1 results and/or will close shortly and impact the full year and we'll try to give you a glimpse of that and that may have been imbedded into our guidance chains.

There were 3 U.S.

based deals in our shredding business, two in records management business in the US and the UK and we bought a company in Germany called Gesellschaft and we bought a company in Italy called Italiana Archivi and then of course we're now singing will close shortly the ArchivesOne acquisition.

The Italian acquisition Archivi closed in March and it will enter our results in Q2.

They have operations in five markets in Italy.

Gives us a good national footprint in Italy we had only had one market covered before this acquisition.

For some time have been looking for the right entry point to get into the Italian market.

It's a good strong market opportunity for us but we wanted to make sure we had the right entry point.

We think we have found that entry point with this company.

They have been in business for about 15 years and they are a strong provider of records management and document management solutions to the financial services and government in Italy.

The Gesellschaft German acquisition is based in Hamburg.

Its a provider of document management solutions, services specializing in scanning and processing and subsequent archiving of documents.

It just adds capability to our portfolio in Europe where we see increasing demand for these kinds of services.

And then last ArchivesOne for those who don't know.

ArchivesOne in our opinion was a very strong attractive company.

The management team there had done a good job of building a nice business and they've been a mini-roller, they've done a a good job of acquiring companies and integrating them around the U.S.

They are headquartered in Middlebury, Connecticut and they have created operations in a significant number of cities.

They overlap with us.

31 facilities and 17 metropolitan markets and 10 states.

So you know, it's a nice business.

Of course this was a very competitive bidding process.

We think a lot of this is driven by availability of capital both in the debt and equity markets.

We see not only a good quality business, which is why we liked it.

We see a business that we can integrate into well and easily.

There will be some integration expenses in the near term over the next 12 months.

Maybe 18 months.

Over the long run we have tremendous synergy opportunities because of the overlap of this in our current businesses.

It is a business of which over 95% of revenues are derived from the storage related services of paper records, boxes and files.

They also perform other services in our physical spaces so it's a good natural fit to us.

It's business we've done a long time.

The other thing I'd say about it was, they were in our opinion the best acquisition platform in our business outside of us.

They've done a really good job.

They knew what they were doing.

They have a strong team and we're going to take advantage of that team we believe in helping join us and grow our organization and grow our business.

So we're happy to announce the ArchivesOne deal.

That will close shortly.

I can't be exactly precise but I think in the next week if not sooner I think that deal will get closed and done.

As I said, more acquisition opportunity or activity in size and scale than we've seen for a couple of years.

But transactions didn't make sense to us on a present value basis and transactions didn't well frankly by margin accretive to us over the fullness of time as they fold in and so forth.

So we feel good about what we're doing there.

As I said our business is, the foundation of which we're operating under supports this kind of activity.

And last but not least the great work we've done in treasury operation and can receive a more financial flexibility and sets the stage for us over time, reducing cost of capital and creating substantial savings on a cash flow basis, which you'll hear about shortly.

Let me turn it over to John and we'll come back and and take your questions and wrap up.

Thank you Richard.

Good morning everyone and thank you for taking the time to join us today.

The slide 3 is my agenda for this morning.

The lineup remains the same as in past quarters.

I'll take you through the Q1 results and give you some additional color on revenue growth and discuss CapEx and free cash flow.

When I get to the section on debt I'm going to invite our Jeff Lawrence, our senior vice president and treasurer to join the call.

He will take you through our global treasury program and discuss the various steps we have completed to date.

I'll come back and we'll look at guidance for Q2 and the balance of the year.

So lets move to slide 4 and review the key financial messages for today call.

As Richard mentioned, 07 is off to a good start.

The business performed very well posting solid results in the first quarter.

Revenue and OIBDA exceeded our forecasted ranges and free cash flow was very strong.

We are raising our full year guidance based primarily on the projected impact of the acquisitions we have completed.

Also included in our guidance are the expected results of operations from ArchivesOne, which Richard mentions and which we anticipate closing this month.

As I mentioned and as you'll hear from Jeff in a minute our treasury group has made significant progress in the development and implementation of a global treasury program that enhances our financing flexibility, Improves our position relative to foreign currency exposure and generates significant cash savings.

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

Slide 5 compares results for this quarter to Q1 of 2006.

Overall we had a strong quarter with the business performing well across service lines and geographies.

As you can see, revenues increased $69 million or 12% to $633 million in Q1, 2007 compared to Q1, 2006.

Our revenue story remains a good one and I'll provide some additional color on that in a few minutes.

On the operating front our gross margin was 53.4% for the quarter essentially in line with the same period last year.

And operating income before depreciation and amortization or OIBDA as we call it was $157 million or 24.8% of revenues.

From a segment perspective the first quarter margins for the North America physical businesses were in line with Q1 2006 margins.

The worldwide digital segment is showing sale economies with higher revenues driving higher incremental margins.

And as expected international expansions into new geographies and service lines.

Primarily through acquisitions and joint ventures continue to pressure margins in that segment.

Let me now give you a bit more color for each of our segments.

In North America margins were positively impacted by strong service revenue performance, particularly increased special projects, continued strength in our fulfillment business, and higher paper prices.

Cutting against these positive factors were anticipated increases in property insurance.

In the worldwide digital segment, strong software licence sales and recurring service revenues derived from those sales drove the service revenue growth in the first quarter.

This is a scale business and we are seeing the positive margin impact of this growth.

Finally, the dilutive impact of our strategic acquisitions in Europe and Latin America.

Startup losses in certain international joint ventures and the loss of gross margin associated with the July warehouse fire in London, are putting pressure on the margins in the international segment.

Although we expect all our acquisitions to improve their margins as they mature Some such as the shredding businesses in the UK and the document management solutions businesses in Brazil and Europe

will never reach the gross margins of the storage business due to their service component.

The tradeoff here is that these businesses require much less capital than the physical storage businesses do.

Finally, let me note that our Australia, New Zealand business has not completed its planned real estate consolidation program that was underway at the time of the acquisition.

That business will create margins once that program is complete.

Depreciation was $52 million and Amortization was $5 million for the quarter.

Included in our Q1 depreciation is approximately $1 million of accelerated depreciation related to acquisition buildings we have decided to exit.

Moving to slide 6, you can see that interest is $50 million for the quarter compared with $47 million for the first quarter of last year.

This change is primarily related to higher debt balances.

In Q1 2007 we had other income of $8 million or $0.02 per diluted share versus $3 million or $0.01 per diluted share in Q1 of 2006.

As discussed on our last earnings call included in the 2007 number is $9 million dollars of business interruption insurance recoveries related to the London warehouse fire.

We had diminimis net gains related to foreign currency exchange rate fluctuations as we mark our intercompany debt to market in Q1 2007 versus net gains of $1 million in 2006.

We also recorded $2 million there are of early debt extinguishment charges related to our first quarter financing activities.

Looking forward to the second quarter we expect to record an early debt extinguishment charge of approximately $4 million related to the refinancing of our old senior credit facilities here and in the U.K.

Finally, you can see that net income has increased to 27% to $35 million for the first quarter of 2007 compared to the same period in 2006.

Approximately one third or $0.01 per diluted share of the increase in net income is due to the drop in our effective tax rate from 43.1% in Q1 in 2006 to 38.6% in Q1 2007.

As we have previously discussed, the implementation of our global treasury program has many benefits one of which is a favorable impact on our tax rate.

This is what you are seeing here and Jeff will be speaking more about this program shortly.

Let's now move to slide 7.

These are the key revenue messages for the quarter.

Our total revenue growth was strong at 12%.

Storage revenue grew at 10%.

And service revenue grew at 15%.

Total internal revenue growth for the quarter was 9%.

Acquisitions contributed 1% to total revenue growth.

And favorable foreign currency exchange rate fluctuations contributed the remaining 2%.

The storage internal revenue growth rate for the first quarter of 2007 was 9%.

The North American box business continued to provide a solid foundation for our consolidated internal revenue growth.

Also contributing to the storage growth rate were solid results in Latin America, Asia Pacific, and in our digital data protection business.

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

The service revenue internal growth rate for the quarter was 10% as we saw strong special project revenues in North America and Europe, higher service revenues in our digital business, and continued strength in our fulfillment business, recycled paper prices were high and contributed to the improved service internal revenue growth rate.

Moving now to slide 8, you can see how our internal growth rates stack up against our forecasted ranges for the full year.

With the exception of complementary services revenues, all of our internal growth rates were near the middle of our forecasted ranges.

For the full year we expect our storage internal growth rate to come in at 9%.

That being said, we also expect the quarterly rate to move around within the range due to rounding and uneven digital storage growth in 2006.

Complementary revenue internal growth was strong at 14% for reasons we've already discussed.

This revenue stream is more difficult to predict and thus has a wider range than our storage and storage related recurring revenue streams.

Let us now turn to slide 9, Capital spending and investments.

In the first quarter of 2007 we had capital expenditures totaling $71 million including $7 million in discretionary real estate spending.

We are currently spending according to our plan and expect that by the end of the year, we will be within our forecasted ranges.

Our capital spending is rarely spread evenly throughout the year and the increased investment over the next three quarters will be driven primarily by investments in storage systems to bring on additional capacity.

On a related note.

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

The construction number has some seasonality as activity picks up as the weather improves in the northern hemisphere.

Many of our real estate acquisitions are slated for later in the year.

Continuing on slide 10 looks at our year to date free cash flow for 2007 compared to the same period for 2006.

We have changed our presentation of free cash flow slightly to better reflect how we think about making certain investment decisions.

All we've done here is separate is capital spent on real estate, net of any dispositions from our other capital expenditures.

We show that as an individual line item along with the cash paid for acquisitions.

As is the case with acquisitions we can choose not to buy real estate and opt instead to lease a facility.

Real estate acquisitions are essentially discretionary financing decisions that are inherently lumpy.

They are not directly tied to the growth or ongoing operations of the business.

Real estate dispositions arise in the context of rationalization of acquisitions and represent good opportunities to invest in consolidation plans that yield good returns and margin improvements.

As you can see we generated $33 million of free cash flow before acquisitions and discretionary investments compared to a negative $12 million in the same period of 2006.

There are two main drivers of this result.

First, we received $17 million of insurance proceeds in the quarter related to the London warehouse fire.

Of that amount I've already discussed the 9 million received under the business interruption portion of our claim reported in other income on our P&L.

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

The second main driver here is our working capital results for the quarter which was essentially break even.

This was due primarily to very strong account receivable collections in the quarter as well as increased in accrued expenses.

Year to date spending for real estate was $7 million in 2007 compared to 3 million in 2006.

And for acquisitions we spent 20 million in the quarter of 2007 compared to 27 million in 2006.

I'd like now to turn the call over to Jeff Lawrence for a discussion of our international treasury program and our new capital structure.

Thank you, John.

Please turn now to slide 11.

As most of you know, we've been very active in the capital markets over the past 10 months.

These activities are part of a broader strategy to accomplish three key objectives.

First, to better align our treasury activities and capital structure around our increasingly global footprint in a way that help reduce our foreign exchange risk.

Second, we saw an opportunity to create a more flexible capital structure that extended our debt maturities to more closely track our predictable cash generation profile.

Finally, we wanted to recharge our liquidity position given our robust pipeline.

As an additional benefit of this process, we saw an opportunity to create tax efficiencies mindful that our NOL, operating losses, were being consumed rapidly.

The planning for this major infrastructure initiative began 18 months ago when we retained a group of outside advisers to help us develop some of the key elements of a multi-year program at a cost of $2 million.

We're pleased to report substantial progress against the implementation of this plan.

One of the key deliverables of this effort was the creation of our Swiss treasury center outside Zurich to handle European treasury operations, including the financing of growth and daily cash management.

We also advanced several successful high yield offerings, closing five transactions over the 9 month period from July to March.

Through this process we raised approximately $750 million of senior subordinated notes.

Two thirds of which were in euros and C dollars and the balance in U.S.

dollars.

The euro and C dollar transactions represented a first time we had issued in these currencies.

We were very heartened by the interest shown by our new investors in Europe and Canada.

These foreign denominated notes will significantly reduce our FX risk by hedging overseas investments in these currencies.

Then in April, we closed the $900 million global senior credit facility which consolidated our two bank facilities in the U.S.

and U.K.

Our new facility consists of a $600 million revolver and a $300 million term loan, the maturities of which are five and seven years respectively.

By combining our credit facilities, we now have unfettered access to our global liquidity while enjoying increased flexibility with respect to currencies and cross border capital movement.

And we're not quite done yet.

Over the next year we plan to tap a new source of capital namely AR Securitization.

This source of capital is expected to provide the lowest cost of funds within our portfolio and provide additional flexibility and liquidity.

The benefits of this plan are significant.

We now have a functioning treasury center in Switzerland, which is managing our intercompany debt and daily cash positions in Europe.

Eventually, we will have the capability to support all of our operations outside North America.

Our liquidity has also been strengthened.

Reflected in the fact that we currently have

$200 million of excess cash and $300 million of available capacity under our revolver sitting here today.

Lastly, we will save approximately $4 million in cash taxes this year as a result of our program with the cash savings projected to increase to approximately $25 million per year once we consume our NOLs at the end of 2007.

Overall a great return on our investment.

The outcomes of this program are on our debt statistics can be seen on the next slide, No.

12.

which reflects all transactions closed to date including the new senior credit facility on a pro forma basis.

The upper left-hand graph depicts our current maturity schedule and as you can see our earliest meaningful principal payment becomes due five years hence in 2012.

Through the treasury program we have added in excess of 2.5 years to our weighted average maturity bringing it to about 8 years.

As the upper right-hand chart shows, we have accomplished this implementation while maintaining our consolidated leveraged ratio within our target range.

In terms of key statistics consolidated leverage is 4.3, net debt i.e.

net of cash is 2.6 (inaudible) and our weighted average interest rate is 7.6.

We are currently 81% fixed with respect to interest rates well within our philosophical range of 80 to 85%.

We are pleased with our progress on our global treasury initiative and expect that it will provide substantial benefits for us as we move forward.

I will now turn the microphone back to John.

Thank you Jeff and as you can all tell, Jeff has been a very busy fellow over the last 10 months.

Let's wrap up with a look at slide 13, our guidance for Q2 and the full year 2007.

As I already mentioned.

We are raising our full year guidance to reflect the projected impact of acquisitions we have completed to date.

Including ArchivesOne, which we expect to close in the next few weeks.

After the acquisitions our guidance would not have changed.

Well we are off to a good start.

Some of our Q1 performances, the results of timing issues around undertaking certain initiatives, which are still on the docket for us to pursue this year.

We expect revenues for the full year to be in the range of 2.6 billion to 2.66 billion.

Operating income should be between $434 million and $457 million and the depreciation and amortization should be between $231 million and $236 million.

That employs OIBDA for the year of between $665 million and $693 million.

We are also increasing our CapEx range slightly to reflect the recent acquisitions.

CapEx for the year is expected to be in the range of $395 million to $425 million.

You can see the second quarter guidance here as well.

Keep in mind that variability and the timing of the ArchivesOne closing and the commencement of the integration will have a greater impact on the Q2 results than on the full year.

Finally, I want to make you aware of an 8K that we expect next week.

Our primary Canadian operating subsidy has outstanding Canadian dollar senior subordinated notes sold in March 2007, which are required to be publicly registered in the U.S.

As such, it's financial position and results of operations need to be broken out separately for the benefit of the holders of these notes.

Therefore, we will file an 8K that changes the disclosures in our previously filed 2006 10K to show the Canadian company separately from the non-guarantor column as was previously the case.

Thank you, and with that, we will now open the phones to take your questions.

(OPERATOR INSTRUCTIONS) The first question comes from Mike Schneider with Robert W.

Baird

Good morning, guys.

Firstly, we can just focus on pricing contribution.

We've talked over the recent quarters that you expect the pricing contribution to rise this year and over the next five year window.

What do they contribute and what if anything has changed in your view.

Nothing has changed in our view and contributed about a point to North American storage growth.

ANd North American organic growth for the box business was what this quarter?

8%.

8%.

Okay.

Then just in terms of CapEx spending, it doesn't look like the IT budget changed for the year.

But I'm curious where you view your position today in e-mail archiving defensibility and the investments needed to keep the position you've got in that business and just your competitive position as well.

That business is morphing as the SEC which was the first segment of that business market somewhat saturates I think our competitive position in that market is fine.

We've got a customer base that we like and I think we're doing a good job for them and we will continue to evolve and invest in that business.

But most of the big customers have outsourced and chosen a direction in that space.

The next space coming online after that is the corporate e-mail market, which is starting to happen.

Our product is not as well tuned for that as I'd like it to be but we're making strong headway to get there so we will keep investing in it to get there and a lot of that has to do with cost structure, not capability per se.

We are investing through our cost structure down in that space and we are going to keep doing that.

And Richard, do you think that the software platforms you've got today are defensible or must you go out and acquire capabilities?

I think that's a broad question.

If you ask about e-mail archiving per se, I think we'd probably find or said another way the platforms we're building will take us where we need to go.

But, if you ask about the digital business broadly, I know we have said in the past we as we have already stated, we have an acquisition appetite in the digital space.

We would look at two types of acquisitions by and large.

One to bring us intellectual property or capability.

This is technology or product we can fold into our distribution channels.

Or those that bring us that plus revenue.

They're two very different types of acquisitions.

In the space of protecting distributed data we're a strong player but we are not resting on our laurels.

There's a lot of adjunct and adjacent intellectual property that you can bring to the table and some of that we will do internally and some of that we will probably do through acquisitions.

And Richard when you spoke about the acquisition market becoming more lively does it include the software element or is this more the physical business?

The software market has always been lively and we continue to look around that market and will continue to look around that market.

My general comments are in the physical space.

That's been a market that's been a little slow for a lot of reasons.

We went to a first generation of consolidation of our industry which I think ended a few years ago.

And I think I see maybe a second generation coming, but the size of the targets in this second generation round are just not there as compared to before but having said that ArchivesOne is a nice business, but there's not a whole long laundry list of ArchivesOne out there both in quality or size.

But I think having said it see more transactions and maybe a reasonable number of smaller transactions for the year.

But ArchivesOne in itself is big enough to move the dial for us in terms of how much we are spending and also in our margin bottom line going forward.

Oaky.

Thank you.

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

Thanks.

Good morning guys.

Just a couple follow ups of the previous line of questioning.

Maybe starting with acquisitions.

Could you guys, maybe John, give a little more color about the ArchivesOne deal and the basket of yields and aggregates in terms of total purchase price, incremental revenue, profitability, cost cutting synergy opportunities etc.

Yes The three deals that we spoke specifically about today had aggregate consideration about $217 million, their annual run rate revenue is about 72 million.

The ArchivesOne acquisition is a fold-in and 15 of the 17 markets and in time it should be able to be accretive to margin.

Its current margins are sort of in line with ours but there are obvious synergies that we will harvest there.

The Italian business is a good business.

We had been a little reluctant in the Italian market years ago it was a very, very fragmented market with pricing we didn't like.

It has consolidated and fallen into rational hands and we're excited about that market and that's a business that should perform in line with the rest of our operations.

The business in Germany is a DMS business or it's a very service intensive business that has very little capital requirements but lower margins than the storage business.

Out of curiosity, is there any potential to close the storage facilities to really take advantage of scale economies or I know you don't typically do that.

But also not the case here and you are talking about back office synergies.

Yes, by and large.

We have an ongoing program of facility rationalization, which is independent of acquisitions, meaning that once we acquire a company we put their facilities into a queue based upon quality, economics and lead terms and based upon those parameters where we have bad quality you get out or whether you can improve the economics on a return basis, you get out when the lease is up.

And obviously, we will look at , we look at every deal on that basis and the ones we just did or will be doing will get put in that you queue.

But we have a pretty good queue.

We spent, the number approximately over the last five years we spent the number five years we spent north of $160 million globally doing that, up grading quality of fire protections, security alarms, life, health, safety issues with respect to employees as well as economics.

You know, just upgrading portfolio and we've got, we're still kind of wrestling through the numbers on a global portfolio.

The U.S.

is by and large done.

A couple of exceptions here and there that we're finishing up.

Outside the U.S.

we've got some more work to do there.

We're probably going to spend similar amount over the next four or five years both for improving quality as well as

Great and also as Mike was asking about CapEx, I'm curious if you take a longer term view recognizing that the company has been in a bit of an investment mode from several perspectives here in the last couple of years.

When you look out several years, do you think the CapEx still holds around pushing 400 million as a rough number or do you think.

it's going to be a significantly bigger business.

It is going to be a significantly bigger business.

We think it will get, it will come down some in terms of the amount of capital relative to the revenue growth.

That is, the service mix and product mix and so forth to the business is such that we project, slowly but we project over time that the capital spent per new dollar revenue will come down over time and also you know, don't lose sight of this portfolio reinvestment or cleanup as I say.

Once we're finished with that and we are by and large finished in our biggest market, North America, but once we are finished with that, that is sort of a one time deal, that also will enhance that.

Going the other way in CapEx, which is why we're breaking out into discussions where so you can have a good eyeball object it.

It's my instinct and it is backed by some analysis and everything else, is that we will up our spending in international real estate by and large and I say international that doesn't mean we won't buy buildings in the U.S.

We see outside the U.S.

there's a lot of reasons why it makes a lot of sense for us to buy real estate currency hedges.

But also the lease markets outside the U.S.

are just not as efficient sources of capital as they are inside the U.S.

and we now have a global credit multicurrency where we can do some very interesting things in currencies and cost of capital.

Where buying real estate in some of the foreign markets probably makes a lot more sense.

It's a more efficient, more effective way of doing some financing.

And remember, that's why we've asked John to focus on some of this stuff.

It's complex.

It's a real financial brainer in a lot of cases.

But remember, real estate is an asset we happen to view as something we can pardon the pun warehouse on our balance sheet, its all about financing and its all about keeping our cost of operations and costs of capital down and we see some ways to make that work even better for us.

So that gets accounted for and the reason to talk loud about it is it gets accounted for as going through cash flow it's CapEx.

We think about it as we think about other big investments like acquisitions in a different way.

Okay.

Great.

Thanks.

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

Hi, gentlemen.

Could your just go over the near term impact of ArchivesOne.

How much it might cost in the second quarter in terms of integration and how long it might take for everything to be completed.

Accretive I think we're thinking outside 18 months give or take.

Is that a good number guys at the table?

Yes John you can answer the quarter.

I'll give you the top answers, we gave your quarterly guidance.

It's in there.

Absolutely.

I just wanted to know how much.

I'll let John do that for you.

It depends on timing and I'm going to ask you to give me a pass here because we haven't conducted the employee meetings with the target company yet.

Okay.

How about a different question on just the range of operating income in the second quarter, John, when you look at 103 and a 110.

What things come to mind other than ArchivesOne that could account for the variability between, it's a very normal range, what might tend operating income in the second quarter to be towards the low end or the high end or is it primarily the ArchivesOne that you're talking about?

It's not only -- it's not only the commitment of the integration plan on that deal but it's the also the timing of its close.

It's the, it's external factors like the cost of market price of recycled paper.

It's the vigor with which we pursue certain discretionary initiatives and its basically just the robustness or lack thereof of service revenue

on the margin revenue.

Like projects and software sales and.

and we just had a really good quarter of project revenue (Overlapping Speakers)

Is there anything to make you feel like second quarter won't be more of the same?

or it just well be more of the same

I think it's not something we have that good of an insight into.

The level of detail of some of it on the revenue side on the margin revenue side.

But we have no reason to believe it's going to be any better or any worse.

Okay.

That's very reasonable.

Thank you so much.

If we knew exactly what's going on we'd just write it down but we don't.

The next question is Michael Morin with Merrill Lynch.

Thank you very much.

Good morning everyone.

I was wondering on the ArchivesOne you said that was a competitive bidding.

Were you competing with private equity or can you describe how the process worked.

It was a classic investment banker led, yes, I'm sure we were competing with private equity.

Exactly who although I could guess.

It was I think a good property, hotly contested, because as I said, I think they were the best acquisition roll-up platform in our business and that's a valuable asset for somebody to own.

Okay great and then shifting gears to the digital side.

Can you talk about the growth you saw year on year perhaps.

And has there be any change in the competitive landscape there.

Certainly, it seems from the trade journals that perhaps there has been a bit of a pickup in competitive intensity there.

While we are looking for the numbers side of your questions, on the competitive landscape change, I don't know.

But announcements there have been more entries or more people coming into the backup space a bit.

You see that.

In the archives space, I don't think there's any particularly new things going on there.

Microsoft has announced some enabling technologies, which I think I've said before but if have not I will, that is going to help move the corporate email market in my opinion.

The corporate e-mail market is going to shake down two solution strategies and one is going to depend heavily on Microsoft and Microsoft has started to put in market to enable technologies within their platform to allow people to mark emails and for retention purposes and therefore they can be archived in a compliant manner and that was a missing element in that market.

Just how one can identify and it'll come down that there will likely be two strategies that will be user defined or user marked or some intelligent system trying to classify them.

And I won't bore you with the pros and cons.

But the pros and cons are both solutions and that will market to come down.

Some will choose one and some will choose the other.

Our perspective is, we plan to operate with both solutions sets and integrate with both types.

Okay.

On the growth rate the worldwide digital business grew a little over 20% in a quarter versus Q1 of last year.

That's all internally.

Haven't made any acquisitions in that time frame.

We expect that might slow a bit as the year goes on given the explosive growth we saw in the email archiving side over the last year and a half.

And has profitability now?

Yes.

It made a slight loss in Q1 of last year.

It's solidly profitable in Q1 of this year with EBITDA margins north of 10%.

It's a business of which we've said the revenue growth this year will be growth rate will be down some from the prior year because of the robustness of the prior year.

It's a business in which we feel good about our market positions.

We've got work to do.

Obviously, in places it's not a business you can sit still on and just rest on your laurels.

You always have to keep working.

Its a business in which we've been focusing on strengthening our organization.

We've recruited and organized some significant talent into the space and a business that we feel pretty good about where we are today.

We're profitable but we're not as profitable as we think we will be.

We think this business over time will accrete margins to the overall company (inaudible)

Great.

Thanks very much.

Your next question comes from the line of Peter Carrillo with Citigroup.

Hey guys, couple questions for you.

First one is administrative a little bit.

On tax rate did I hear you John correctly, tax rate for the third quarter did you say 36.7.

First quarter was 38.6.

And second quarter.

I don't know.

Our best guidance is for the rate to hover around where it was in the first quarter for the rest of the year.

Okay.

And in terms of looking further you're end of '07 you're exhausting NOL.

Is that correct?

More or less, yes.

Federal U.S.

income NOLs.

In '08 and beyond we're going to see provision for deferred income taxes go to zero.

Is that right?

Start.

Not exactly.

Firstly, the NOLs, you don't completely consume them but you are limited as to how much you can consume in any one particular year.

There will be some staying on the balance sheet.

Okay then another question on the issue of competitive environment for the digital business.

There's a story out that you lost a contract, the GE contract to a little startup.

Can you elaborate a little on that?

GE is a big company and we're still doing a lot of backup for them.

Okay great.

Thanks.

Your next question comes from the line of Scott Schneeberger with CIBC

Please proceed sir.

Hey good morning.

On the tax rate.

I'm sorry, so that is I just caught the end of that.

It's going to be the same as the first quarter level through the end of the year.

That's our best view now.

Okay thanks.

And the, on acquisitions I think your mentioned that in the past where you may have had to whip them up, they seem to be whipping themselves up and you gave some reasons for that.

Were you talking just North American physical storage or could that be considered for Europe as well?

Just a little more color there please.

We're still doing transactions in Europe.

But the transaction pool opportunity pool is much smaller in Europe.

But yes, it's primarily in North America we're seeing an activity increase.

Okay and the fact you mentioned a nice lead into Italy.

Are we going to see more tuck-ins there and more entry of new European markets or from your comments just now should we expect much strong acquisition growth?

I thin you will see with the trend will go a little bit like this.

On international and in terms of numbers of deals and trying to build our footprint we continue to focus there and those places , you pull out a map and see what we're missing.

So won't be quite that clear.

You can do your own work.

We're doing work in Asia Pacific area and we're still doing work in eastern Europe and a little bit in central Europe.

Some of that like Russia is a joint venture and we've done a startup and Moscow frankly is coming through our income statements as a negative number.

We're running startup losses but it's going to be a gang buster business over time.

We're going to expand in Saint Petersburg.

So we are doing a little more stuff like that with startups in certain parts of the world and Asia Pac and we're constantly looking at things out there.

But it's a much slower process I think for deals to come to fruition in those parts of the world.

And but U.S.

will be mostly tuck-ins and Canada's too for that

Okay thanks so much and shifting gears a little bit.

You've covered a lot of CapEx and thanks for that.

You did mention though at the top of the call a bit of a slow start to the year.

I was just wondering if you want to dig deeper.

We see the full year guidance but any reasons behind that?

A couple reasons.

Some of the big CapEx dollars go into facility buildouts.

Its just the timing of when some of those come online.

And then secondarily, we have a pretty good stack of what we call infrastructure and other projects related to improving the business and building ourselves to be a much bigger business.

Some of those we delayed the start on because we weren't ready.

This that, and the other.

Things we budgeted for this year.

The reason I spoke about that is that type of project typically when you start spending money in the capital side you also tend to wrap up some expense side to those kind of projects.

There are IT projects and things where there's consults showing up or this that and the other to help you put in the systems or processes And they tend to have a drag along into the income statement whereas outfitting a building doesn't tend to have a drag along not income statement.

I speak of that level of granularity just to reinforce the messages.

It was a good quarter in Q1 but we expect the year to be the year.

And we made some, it's just the vagaries of how you manage things a little bit.

Thanks very much.

And your next question comes from the line of Andrew Berg with Post Advisory Group.

Can your just give me a little bit of better understanding as you move forward now with the AR facility that you mentioned.

Is the plan to establish that and then to sell off a big chunk of receivables into a bankruptcy remote (inaudible) and if so, what are you going to do with that big one time infusion of cash?

The AR Securitization we're envisioning as you probably know is a very common structure today.

And it does go into a bankruptcy remote element.

The use of proceeds is really dependent upon acquisition pipeline.

You know, right now we've got very much an undrawn position.

At least 300 million undrawn on our revolver.

Obviously, we have the cash to pay for the archives one on the balance sheet today.

The timing of that implementation is really a function of overall acquisition appetite.

Or said another way we're not going to borrow if we don't have a place to put the money.

And one of the places would be paid out other debt on our balance sheet.

This would be designed just around cutting total cost of interest.

But we're not going to borrow money and sit on it.

Okay what's the sense of time.

When would you hope to get this up and established.

We would do it within the next 12 months.

Any feeling closer to the front or the back end of the 12 month?

Can I pin you down a little bit more than sometime in the next year.

Closer to the back end than the front end.

It all depends on the need for the timing and use of the capital.

We're not going to borrow money and sit on it.

This is a strategy to keep stratifying the balance sheet and to reduce cost of capital.

Got it.

Thank you very much.

And your next question comes from the line of Edward Atorino Benchmark Company.

Hi, with the new tax rate going forward will it stay down or get back up to low 40s on a historical basis.

We think it will stay down below 40.

It might move around a little bit.

Let's no be precise.

I understand.

On a second given the ArchivesOne, will you be focusing more on integrating than that buying overseas for the time being or is it just do everything you can do as best you can do it.

We're pretty good at doing everything you can do.

We're going to keep staying good at that I hope.

The advantage of a bigger business is as long as you don't put too much stress in one place you can keep doing a lot of things at once.

Folks in ArchivesOne will keep North American business busy for a little while.

But its a good business which means it is not going to be that hard.

It's just going to take time and work.

So we've got our eyes open and our teams working in Europe and we'll continue that.

Will you be sort of consolidating some of the ArchivesOne stuff into the same markets or just an add on.

You typically don't pick it up and move it unless it's just a phenomenal real estate opportunity.

They don't have anything that bad.

I think it's not going to be a lot of moving.

More just getting systems installed and things like that.

Thanks a lot.

Your next question comes from the line of John Broderick with Permit Capital.

Thanks for taking my call.

I have two questions.

The first is on taxes.

As the NOLs burn off towards the end of this year and early next year.

Have you considered applying for REIT status and then I've got another question.

We periodically examine.

Yes, but we don't have an answer.

if I did, I wouldn't tell you.

Okay.

And my second question has to do with Europe and the expansion into Europe.

As you build out in that market, are there large acquisitions, acquisition opportunities even exist in the storage business or do you expect as you build out in Europe.

Notwithstanding the acquisitions that you've just done that most of the growth there in terms of assets will come on a green field basis as opposed to acquisitions.

Most of it will come on a green field in terms of Europe.

Both for reasons of targets and I want to be careful.

There are some targets there and some of them we'd be interested in buying.

So I don't want to send a negative message to the market.

Having said that we see most of the capital investment over the next five and 10 years in Europe will be internal growth and a lot of it will be in to markets where we already have good positions and it will be feeding the growth in those markets.

Okay.

Thank you.

Look.

We've committed some time ago to keep these calls to an hour and I just realized I've blown that commitment.

And I told you in the beginning that we don't have a lot to say.

I've going to cut this off for the benefit of those that need to go on.

We appreciate your support as usual.

As I said at the top of the hour, we've made some organizational shifts.

It's not the only one.

Over the last couple of years we've worked hard to strengthen our team and add breadth to the team and that's what we're doing now as we run a much bigger business.

We need help and I think we're getting it.

We are also aware that many of you would like to meet new people.

You're getting tired of listening to me.

You probably are not getting tired of listening to John.

You're probably getting tired of listening to me.

And I just want to give you a little heads up that Bob Brennan will be on May 8 at (inaudible) conference in Chicago.

If anybody wants to talk to Bob he'll be there.

John will be there the next day in Merrill Lynch in New York.

That's a one on one for you.

Bob and Brian McKeon will be at Bear Stearns on the 11th of June.

Brian and I will be and John Kenney we're going to have the whole crowd out at (inaudible) Chicago.

And so forth.

Jeff Lawrence Bear Stearns conference on the 15th.

We're intentionally putting more people out in front of shareholders just to give you some variety and let you ask questions of different people to.

So if there is any particular person you want to catch that's where they'll be.

Again, good quarter.

We feel good about the business.

We're taking advantage of some opportunities.

We have not changed our strategy.

We will continue to build our business, our internal growth machines are working pretty well.

We think they can get better.

We will continue to focus on improving our business because we're getting big pretty fast and we plan to continue to get big at a pretty good clip.

We continue to invest in infrastructure and investing in margin improvement.

And so that's what life's about with us and thank you again for your support .

We look forward to seeing you out on the

Thank you for your participation in today's conference.

You may now disconnect, and have a great day.