鐵山公司 (IRM) 2008 Q4 法說會逐字稿

Good morning.

My name is Vonda, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Iron Mountain fourth quarter 2008 earnings webcast.

(Operator Instructions).

Thank you.

Mr.

Golden, you may begin your conference.

Thank you.

Good morning, everyone, and welcome our 2008 fourth quarter and full year earnings conference call.

After my announcement this morning, Bob Brennan will give his state of the Company remarks, followed by Brian McKeon who will deliver the financial review.

When Brian is finished, we'll open up the phones for Q&A.

For those of you here in Boston, we will be presenting at the Robert Baird 2009 Business Solutions conference at the Four Seasons Hotel later this afternoon.

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

Referring now to Slide 2, today's earnings call and slide presentation will contain a number of forward-looking statements; most notably, our outlook for our 2009 financial performance.

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

Please refer to today's press release, the Safe Harbor language on this slide, and our most recently filed 10-K for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.

As you know, operating income before D&A, or OIBDA, free cash flow before acquisitions and investments and other non-GAAP measures 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 various non-GAAP measures to the appropriate GAAP measures as required by Reg G at the Investor Relations page of our website, as well as today's press release.

With that, I'd like to introduce our CEO, Bob Brennan.

Thank you, Stephen.

Good morning, and welcome to our year end conference call.

The format for today's call, I will cover our business per performance in 2008 as well takes progress we made against our strategy, and a few remarks on how I feel about this coming year.

Brian will then review details of our financial performance and provide guidance for 2009.

And afterwards, we will take Q&A, both Brian and I.

But before I get into 2008, I want to plant some key messages with you.

First and foremost, the business at Iron Mountain is doing very well.

Our business is performing, the team is doing a good job.

The core business itself is particularly strong and continues to strengthen.

We're managing well and improving both capability and execution, and this is evidenced by the fact that we hit our 2008 targets and we expect to produce solid results in 2009.

We have improved our cash flow and balance sheet and advanced against our strategy with significant progress across all of our business segments -- and I'll touch upon that in a few minutes.

Now, we are experiencing some pressures from foreign exchange, paper commodity prices -- which dropped dramatically in the back half of last year -- as well as customers deferring on some purchases with our complementary revenue.

Despite those pressures, though, we expect solid performance in 2009.

So now let's drop back and take a look at 2008.

First of all, we had a good Q4.

OIBDA was at the high end of the range.

We did expect pressures on complementary revenue, which represent about 14% of total revenues.

There were impacts from the completion of two public sector projects, as well as lower paper prices and project sales.

Customers did defer in some cases, and continue to defer in some cases.

So, then the question is, how did we hit the numbers?

First, revenue.

Core revenue growth was solid across all of our business units and remained solid.

Just as a reminder, core revenues are the bulk of our revenues.

In other words, they're the other 86%.

These results are driven in large part by North America.

Our North American business just keeps getting better at execution, as well as realizing value for the services we provide in a market where we have significant competitive advantage.

Revenues for the quarter -- core revenues for the quarter were up 9%, with solid 7% internal growth.

So in addition to solid revenue growth, we also hit the numbers through disciplined execution against controlling costs.

We are very careful about which costs we grow, which investments get prioritized, and we're also being very careful about driving efficiency into our organization; and in some cases making targeted reductions because we realized inefficiency.

This is all a function of performance management that's been taking place and been a primary focus of ours for the last few years.

We've been increasingly disciplined about how we manage the business, and it's showing in our results.

For 2008, revenue was up 12% and OIBDA was up 13.

Capital efficiency improved, with CapEx at 10.8% of revenue, excluding real estate; and free cash flow was $182 million before real estate and acquisitions, well ahead of our original expectations.

Iron Mountain is financially stronger entering 2009, with our leverage down at 3.8 times.

Now, it hasn't been that low in a long time.

Our cash capacity stands at $775 million, and we have no debt obligations until 2012.

In other words, the business performed well, our team is doing a good job; and our value proposition despite, all the pressures in the economy, continues to resonate to our customers because we're driven by driving down cost and reducing risk, and that's particularly helpful in these times.

So let me talk about progress against our strategy in 2008.

Many of you know we've employed a consistent, time-tested, three-phase approach; and what I want you to know is that -- and what I'm really trying to bring to life in the next few minutes -- is that we didn't compromise on our strategic agenda to hit our targets last year, and we're not going to compromise on it this year.

We believe we can walk and chew gum at the same time -- that we can perform and pursue a solid strategic growth agenda.

So the three phases that I mentioned, for those of you that have been following these notes, phase one is build a platform, add markets and products.

Phase two is build distribution into those markets, and phase three is about capitalizing on the business, driving growth and returns.

So let's start with the North American Physical business.

This is a great business, and it's squarely in phase three -- driving growth and returns.

We do -- as I mentioned before, we have significant competitive advantage here.

We've made solid progress strengthening this business while we improve returns.

But we remain growth-focused -- some areas of growth for us, where I'm going to talk about some relatively small businesses relative to the market opportunity, where we have made great progress and have strong potential.

Our Document Management Solutions business -- think about this as taking the box business and getting to what's inside the box, and helping customers with their workflow, from imaging, to physical to digital conversion -- this is a business where we have dedicated focus.

We tremendously increased our sales capability as well as our service delivery capability in the past year, and we're very bullish about the business over the short, medium and long-term.

Our healthcare focus -- obviously, this is an exploding market with the proliferation of records in the healthcare segment and the -- just the mess that occurs between the physical and the digital records, and we can help customers across that spectrum, from taking over a file room for a hospital to doing their medical image archiving.

A relatively small business for us today, but we see a large market opportunity; and in the government sector, in just the last few years, we've been very much focused and provided a dedicated team against selling to the government, as well as helping our customers who have to be compliant with federal records because they sell to the government, and we've invested significant capital against this.

Brian will touch on it in a new moments relative to our facilities; but a small dedicated team, small business today, we see great growth potential going forward.

So this is North America -- while we're producing strong returns, we're setting long lines into the future.

In terms of returns, it's the same story I've been saying for a few years, all right?

It's productivity focused on our real estate, network focused on our transportation network, our workflow.

We're doing a good job here.

We go market by market.

We're making steady progress that's sustainable for years to come in driving more efficiency out of that business, and we continue to get value for the services that we provide and we're pleased with the progress we're making on that front.

So net, net, North American Physical is a great business, managed by a great team.

I expect solid performance out of that team and that business this year.

Let's move to International.

International is a key component of our growth agenda.

This is a business that's been developed through acquisition, joint ventures, as well as organic growth.

So they're really in all three phases of the business.

Now, International is behind North America in returns, but it's a business with great potential where we believe we can pursue North American-like returns over time.

The key story is we did consolidate leadership in this segment in the last year and really upgraded management.

Mark Duale is now in charge of International as a segment, and we upgraded management across the continent of Europe with our country managers over the last couple of years, as well as in our Australian business.

We've also had a great deal of success building joint ventures internationally.

If you look at some of our better performing businesses in Chile, Peru and Mexico, these came from ex-joint ventures.

Where we've done fifteen of them, eight have resulted in acquisition.

Those eight are performing very well.

And today, we're incubating joint ventures with very strong partners in Russia, China, Turkey, India, and other emerging economies where it takes a long time.

These are fly wheel businesses; building a storage business takes a long time, but we believe we can establish the same competitive advantage we have in North America and build a very strong business for the very long haul.

We're also continuing to build out distribution capabilities, having invested in sales capability on Continental Europe where we're seeing strong benefits from that; and in our largest businesses, Australia and the UK, it is very much like North America.

It's about driving growth and returns, and we follow a similar playbook.

We bought -- in Australia and the UK, we bought lower return businesses; but we know we can improve those returns by focusing on revenue growth and penetrating our customer base, driving -- basically upselling and cross-selling our existing base, and through cost and performance management that we're familiar with the playbook.

And we know the potential of these businesses because we see it out of our Latin American businesses, which drive very high growth and returns -- and of course, we see it out of our North American business.

So we expect improved incremental performance and scale out of International as we go forward.

So now if I could just turn our attention to Digital.

Digital is about 7% of our business today, and we expect to increase that over time.

But we're still building out the platform.

There's three legs to this platform.

There's data protection --also known as backup -- archival and e-discovery.

Together, that's a platform for providing digital storage as a service where we are the leader and we've essentially created the category.

In building out that platform we did it -- we announced a few key products in the past year, one through acquisition which was the the acquisition of Stratify.

This was a great acquisition for us.

It's a very hot market.

It's a wonderful team and we've had no turnover, and they've performed admirably against their targets.

We're very pleased with the acquisition of Stratify and what that can do for us going forward.

We also announced the product that we previewed for you on Investor Day called Virtual File Store.

We announced it this week.

This is -- think of it as the box business all over again.

We're going to IT organizations now and saying, "Give us your inactive It doesn't belong on your primary computer systems.

We can store it more securely and more cost effectively than you can." And in an era where people don't want to spend money on capital expenses, that's resonating, and we're very excited about the potential of that product.

We also built out our distribution capability during the past year, having announced significant partnerships with Microsoft, where they came to us as the experts for doing cloud recovery because we're the leaders in digital storage as a service, so we are the cloud recovery offering for their data protection product.

McKesson and HP uses us as the service provider for their medical image archive technology.

IBM partners with us through their file net group for prescriptive records management.

Once again, that's where we have the brand; that's where we have the expertise and the permission with our customers.

And within our e-discovery platform with Stratify, we're getting very significant tractions with strong partnerships with PwC and Navigant.

But it's our brand and it's our expertise that have these industry giants seek us out.

Okay, I want to make no mistake about it.

This is a tough time to be selling software.

Sales cycles are longer, people are scrutinizing ROIs, customers are delaying whenever they can.

It's a hard time to be in the technology business; but I want you to remember that most of our business is recurring and already under contract.

We have a recurring business model, and our value proposition is around saving money; so we feel very comfortable with the shakeout that's going to occur in this space.

We're going to be a net beneficiary of it, and there's going to be a lot of shakeout because smaller firms just aren't able to sell their stuff.

So if we back out against that, Digital had a very good year making strategic progress, as did International, as did our North American Physical business.

Let's talk a little bit about 2009.

As we head into 2009, we remain focused on the strategy that got us here, but there are some key points that I want you to consider.

First of all, we're tracking to plan.

Iron Mountain is off to a good start against our growth and productivity agendas across all of our business segments.

We expect to hit our targets despite significant pressures on the complementary revenue -- that 14% of our revenue where we are subject to lower paper prices.

There is pressure on project revenues, and customers are hunkering down as it relates to making discretionary investments.

We'll also see pressure on our reported results from foreign exchange.

But this does not affect the underlying strength of our business.

Business is strong, and that strength is reflected in our targets of solid core revenue growth, and even healthier profit gains.

Let me just talk for a minute about how we're managing in this environment.

We're being very disciplined about where we grow costs, which growth and capital investments we make, and calibrating our spend to reflect both pressures in the market as well as opportunity.

We're pushing the team hard and they're responding.

So while we're managing the business tightly, making sharp choices, we're also very much committed to investing against our strategic agenda.

Key initiatives this year will include advancing our Document Management Services and solutions business.

This is -- we have a unique competitive advantage here.

We already have the facilities.

We have custody of the customers' records.

We have the people.

We've made the investments.

So we have a unique competitive offering here, and we will scale that business aggressively.

We will also focus on scaling Digital, because as I just pointed out through the partnerships that I mentioned, we have permission to become the de facto offsite store for businesses.

We will focus on strengthening our global footprint, both through improving returns in established markets like the UK, and increasing growth capacity in expansion markets around Latin America and Continental Europe.

We will also remain sharply focused on enabling long-term return improvement through smart concentrated investments in our core business.

We will really continue to drive standardization of workflow, including a relentless focus on securing our customers' information assets.

We'll also be focused on realizing value for the investments we make.

So in closing, I just want you to know that we're very pleased with the fact that we hit our targets and advanced our strategy in 2008.

And I want you to know that I'm confident and the team is confident that we can deliver solid performance despite the current climate and build value for the very long-term.

So with that, I'd like to turn it over to Brian McKeon, our Chief Financial Officer.

Brian?

Thanks, Bob.

Good morning, everyone.

Q4 was another solid quarter for Iron Mountain, highlighted by healthy internal revenue growth and strong OIBDA gains.

Storage revenues, which comprise 55% of our total revenues and are a key financial driver, grew 8% organically in the quarter.

Core service revenues, representing another 31% of revenues, posted 11% internal growth.

As expected, the record recent strengthening of the US dollar did lower reported revenue and OIBDA growth in Q4.

Similar to Q3, unusually large exchange rate changes also required us to recognize charges in other expense in our book tax provision, which lowered our reported EPS by about $0.20 per share.

These factors, however, don't alter the fundamental soundness of our business, which performed well throughout the year.

For the full year, we delivered against all of our financial objectives, posting 8% internal revenue growth, 13% comparable OIBDA growth and significant improvements in capital efficiency.

Today, we'll review our quarterly results and provide an update on our full year 2008 cash flow performance, capital spending, and our current debt position.

We'll also provide an updated perspective on our 2009 guidance.

Let's turn to Slide 4, which highlights the key messages from today's review.

The first key message you should hear today is that we continue to drive solid business performance, reflecting the strength and resiliency of our business model.

In Q4, we delivered 9% internal growth in combined core storage and service revenues.

We also drove 11% comparable growth in OIBDA, despite negative foreign exchange impacts and pressures from lower recycled paper pricing.

We continue to execute with discipline, and leveraged strong performance to deliver against our 2008 financial objectives.

Revenues exceeded $3 billion for the first time in our history, and we delivered 8% internal revenue growth for the full year, solidly within our forecasted range.

OIBDA finished the year at $783 million, at the high end of our guidance we originally issued a year ago.

13% year on year growth in OIBDA, excluding asset gains and losses, was supported by strong gains in gross profit and tight cost controls.

We also strengthened our liquidity and leverage ratio this year.

At year end, we had over $775 million in total liquidity, including more than $500 million of availability under our revolving credit facility, which is supported by a well-diversified bank group.

We ended the year with a consolidated leverage ratio of 3.8 times OIBDA, moderately below our long-term target range, reflecting our heightened focus on cash management.

We're a free cash flow positive business before acquisitions, so these positions should continue to strengthen in the absence of significant acquisition activity.

We intend to build on our financial progress in 2009 with goals for solid underlying operating performance.

Our outlook incorporates expectations for continued solid momentum in our North American business, where we're driving strengthened returns through an enhanced focus on execution.

As noted on our last conference call, the unusual strengthening of the US dollar in recent months will pressure our reported results in 2009.

At current rates, we expect foreign exchange will lower reported revenue -- reported growth by about 7%.

Large recent declines in commodities such as recycled paper will also constrain near term results.

We'll review our updated 2009 guidance in more detail today, isolating impacts from these factors to highlight the underlying strength of our financial outlook.

Let's begin with a review of the details of our Q4 performance, starting with a look at our revenue growth performance on Slide 5.

Slide 5 breaks down our overall revenue growth.

It shows internal revenue -- internal growth by major service line, as well as the impact of acquisitions and foreign exchange.

As a reminder, we removed the 2007 and 2008 revenues associated with the divested product sales business from our internal growth calculations.

Although we -- overall, we drove solid growth in the quarter, although reported revenue gains were constrained by negative foreign exchange rate impacts and lower benefits from acquisitions.

Internal revenue growth for the quarter was solid at 7%.

As noted, core internal revenue growth was up a strong 9%, supported by 8% storage growth and 11% core service growth.

Storage gains were solid across our key businesses.

Strong core service growth was supported by gains in North America, including benefits from fuel surcharges and strengthened pricing.

Overall internal revenue growth gains were moderated by a 6% decline in complementary revenues.

As expected, we saw pressure in Q4 due to the completion of our major European public service contract over the last year that resulted in a $5 million reduction in revenues in the quarter.

Lower recycled paper prices also impacted complementary service revenue in the quarter by approximately $4 million.

Together, these factors caused a 9% negative impact to Q4 complementary revenue growth.

We've also seen lower growth in areas such as fulfillment services and software license sales, which are areas more likely to be impacted by economic conditions.

As we've noted in the past, complementary service revenue, which represents about 14% of overall revenues, can fluctuate over time, given fluctuations in demand and timing for special project activity, as well as variations in factors such as recycled paper pricing.

Despite these impacts, our overall internal growth rates remain solid throughout the year, and we delivered against our full year internal growth goals.

Slide 6 compares the P&L results for this quarter to Q4 2007 and breaks down our revenue growth by business segment.

As shown here, we delivered solid OIBDA gains despite pressure from foreign exchange and lower complementary revenues.

Reported revenues reached $753 million in Q4, up 4% supported by solid storage growth across our business.

On a constant dollar basis, revenues grew 8% while OIBDA grew 13%.

Our largest segment, North America Physical, posted strong core revenue internal growth of 10% and 7% internal growth overall.

We saw solid growth across our records management and data protection and (inaudible) product lines.

Overall growth was supported by solid storage gains and strength in core service revenues.

These gains were offset by declining recycled paper prices and anticipated softness in more discretionary areas such as special projects and fulfillment revenues.

Our International Physical business reported internal growth of 4%, supported by continued strength in our Latin American business and solid storage internal growth in Europe.

As expected, we saw declines in complementary service revenues in Europe, as the second major project we've been speaking about was concluded in the third quarter.

These declines reduced International revenues by $5 million or about 3% in the quarter.

In addition, significantly weakened foreign currencies reduced our reported results in this segment by approximately 11 percentage points.

Our digital segment also drove strong revenue growth, with 26% gains overall, supported by 11% internal growth and continued solid performance from Stratify.

We saw solid growth in storage revenues; and as expected, some weakness in more discretionary purchase areas such as software license sales.

Operational gains in our North America Physical segment drove improvement in gross profit.

Gross margins were up 150 basis points for the quarter compared to the same prior year period, supported by productivity gains and improved storage gross margins in North America.

Gross margins also benefited from the sale of the low margin data product sales business.

Year on year, SG&A growth was 3% in the quarter, slightly below the rate of revenue growth.

SG&A growth -- SG&A cost growth moderated as expected in the fourth quarter, reflecting our tight focus on execution and cost control.

OIBDA, which grew 9% on a reported basis to $199 million in Q4 of 2008, included $3 million of asset write-offs related to building moves in North America.

Note that our Q4 2007 results included a $1 million net gain on asset dispositions.

On a comparable basis, excluding asset gains and losses, OIBDA grew 11% in Q4 2008 compared to Q4 2007.

Depreciation was $64 million and amortization was $9 million in the quarter.

The year on year increase in D&A was driven primarily by amortization related to the Stratify acquisition completed in December of 2007.

Operating income was $126 million for Q4, up 10% versus the prior year, in line with our OIBDA gains.

Slide 7 bridges our Q4 operating income to net income and EPS results.

While we drove solid operating income gains in Q4, our net income and EPS results were negatively impacted by charges related to large recent changes in foreign currency exchange rates.

As noted, operating income for the quarter was up 10% to $126 million, supported by strong gains on the gross profit line and moderating growth in depreciation, reflecting tight capital controls and the absence of acquisitions in the quarter.

Our Q4 interest expense was $57 million, down 3% from Q4 2007, due primarily to decreases in our net debt and weighted average interest rate.

These gains were offset by impacts to other expense in our effective tax rate from changes in FX rates since the end of the third quarter, which reduced net income by $40 million or $0.20 per diluted share in Q4.

As a result, we reported net income in the quarter of $1 million or $0.01 per diluted share.

As we discussed in our last earnings call, large fluctuations in foreign currencies during a quarter can result in meaningful accounting impacts as we mark our forward contracts in debt to market and record the appropriate tax effects from these changes.

In Q4, FX changes drove us net $16 million charge in other expense.

We also recorded a $24 million tax provision on these amounts, reflecting both foreign currency gains and losses incurred in different tax jurisdictions.

As noted in our last call, while large changes in FX can impact our reported results, true economic impacts to our business are mitigated by some key factors.

First, as a service Company, our costs are matched with our revenues in local currencies.

We've also aligned our international assets and liabilities in the same currency, with international net asset positions about 90% hedged.

Finally, our international businesses are funded with local currency cash flows and debt financing.

As such, we're not exposed to reliance on repatriation of funds from our international operations.

We'll continue to highlight the discrete impacts from FX changes in reporting our results to reinforce the strength of our underlying business performance.

In Q4, the impact of foreign currency rate changes increased our effective tax rate by about 60 basis points.

Discrete items such as FIN 48 interest, addition to tax reserves, and other adjustments also added a net 5% to our effective tax rate in the quarter.

For the full year, our tax rate before the impact of foreign currency rate changes and other discrete items was 38%.

We're estimating our tax rate before the impact of foreign currency rate changes and other discrete items for 2009 to be approximately 39%.

Let's now turn to Slide 8 to look at our full year performance.

Our solid Q4 performance supported strong full year results, at the high end of our original full year goals for revenue and OIBDA growth.

For the full year, we achieved all of our stated financial goals -- 10 to 13% revenue growth, 10 to 14% OIBDA growth excluding asset gains and losses, and improved capital efficiency.

Balanced growth across our key businesses and service lines drove solid overall revenue gains of 12% and internal growth of 8%.

Acquisitions added another 3%, and year-over-year favorable currency changes added about 1% to revenue growth.

OIBDA growth of 13% excluding asset gains and losses, was supported by a 14% growth in gross profit, reflecting our focus on operational execution, particularly in North America.

Net income and EPS declines reflect the impact of foreign exchange rate changes on other expense in our effective tax rate.

Other expense was $31 million in 2008 versus $3 million in 2007.

Our effective tax rate increased to 64% in 2008 versus 31% in 2007.

Combined, foreign exchange impacts and the related tax provision reduced net income by $69 million or $0.34 per diluted share in 2008.

Also included in our 2008 results is a $0.02 per share impact of net losses on asset dispositions.

As a reminder, our 2007 results benefited approximately $0.80 per share from net gains on asset dispositions and a lower effective tax rate due to the impact of foreign currency rate changes and other discrete items.

Absent these impacts, we drove solid underlying profit growth in 2008.

It's important to note that the impacts of foreign exchange changes on our tax rate were primarily non-cash in nature.

Let's now shift to reviewing drivers of our cash flow performance which improved solidly in 2008.

Slide 9 summarizes our capital spending for the year compared to 2007 full year results.

We made significant progress against our capital efficiency goals in 2008, with CapEx before discretionary investments in real estate representing 10.8% of revenues.

This is down 270 basis points from the comparable measure in 2007.

Our total CapEx for 2008 was $373 million, including $44 million for real estate.

Tighter controls around capital spending and increased asset utilization rates were key drivers of improved capital efficiency in 2008.

Additionally, we deferred a portion of our data center expansion into 2009.

We remain focused on aggressively driving efficiencies in our capital spending while supporting key growth initiatives and projects that help drive long-term return improvement.

We'll review our updated projections for 2009, which look to extend this solid progress, as part of our guidance discussion.

Let's now move to Slide 10 and and look at our free cash flow for the year.

Slide 10 highlights our cash flow performance for the year compared to 2007.

For 2008, free cash flow before acquisitions and discretionary investments in real estate was $182 million, well above our original forecast range.

The year on year increase in free cash flow is supported by solid OIBDA growth and tighter control over capital expenditures, reflecting the benefits of our disciplined approach to managing the business.

Also included in the cash flows from operating activities is a $24 million realized cash gain on a British pound hedging contract that rolled over in the fourth quarter of 2008.

Relatively low levels of cash tax payments supported strong cash flow this year.

Cash paid for taxes in 2008 was $44 million, as we benefited from the use of past NOLs and a change in US tax law that allowed for accelerated depreciation on most US property additions.

In 2008 --in 2009, excuse me -- we expect our cash paid for taxes to be approximately 50 to $55 million, including the benefit of continued accelerated depreciation provisions contained in the recently enacted stimulus package.

We'll discuss our projected free cash flow for 2009 in the outlook section of today's presentation.

Now let's turn to Slide 11 for a review of our current debt and liquidity position.

We continue to strengthen our balance sheet and liquidity.

In terms of our debt portfolio, we ended 2008 in a very strong position.

Our weighted average interest rate is down 7%, and we're 80% fixed.

Maturity is now at 7.2 years, with no meaningful repayment obligations until 2012.

Consolidated leverage at year end was 3.8 times, below the low end of our target range of 4 to 5 times OIBDA and well within our 5.5 times covenant limit.

As we have discussed in the past, our business will naturally delever if we choose to control acquisition spending.

With a modest level of acquisition spending in 2008, and the benefits of our disciplined focus on operating cash management, we saw significant improvement in leverage ratios and liquidity this year.

We currently have over $275 million in cash and $500 million in additional borrowing capacity.

As Bob mentioned in his opening remarks, we have a very strong balance sheet and we're well-positioned in terms of cash and financing capacity.

While we maintain a strong operating outlook, we anticipate maintaining a more conservative approach to cash management in the current environment.

This concludes our review of the Q4 and full year 2008 results.

In summary, we're very pleased with our results this year, both operationally and financially.

Operationally, we're particularly pleased with our progress in strengthening our core North American business, which is the engine for our financial performance, while expanding our International and Digital growth platforms.

Financially, we delivered our financial goals this year in a tough environment while strengthening our balance sheet and cash flow performance.

Let's now turn to page 12 and discuss how we intend to build on this progress in 2009 through a review of our financial guidance.

In terms of our guidance for 2009, there are three key messages you should hear today.

The first is that we intend to sustain solid internal revenue growth in 2009, supported by 8 to 9% core internal revenue gains.

As demonstrated through our recent performance, our recurring storage revenues remain strong and we believe we can us sustain solid core service revenue growth in 2009.

We also intend to drive strong comparable OIBDA gains at or above the rate of revenue growth.

Our objectives in 2009 are for 8 to 13% growth in OIBDA on a constant dollar basis, building on our solid 2008 results.

As we'll discuss in more detail later, about 3% of this growth is related to certain of our vehicle operating leases now being classified as capital leases upon renewal.

These objectives reflect the solid progress we're driving across our business, including benefits from pricing and productivity initiatives in our North American business and a disciplined approach to cost management across the Company.

Finally, while our underlying business fundamentals remain solid, we do expect pressure on our reported results from significant recent changes in foreign exchange rates and recycled paper pricing.

We estimate that FX changes will reduce reported growth rates by about 7% in 2009.

Commodity prices, which declined dramatically in Q4, will add pressure to complementary revenues and lower our internal growth rate in 2009 by about 2%.

Let's review our outlook in more detail, starting with a breakdown of our revenue growth guidance.

The table on Slide 13 shows our expectations for internal growth and total growth in 2009, including impacts from FX and acquisitions.

In terms of our core revenues, which represent 86% of our total revenues currently, we're targeting sustained strong 8 to 9% internal growth in 2009.

We expect our core storage trends to remain solid across our business.

We also expect benefits in 2009 from efforts we've been advancing to improve our pricing for storage and core services, which is adding support to our growth outlook.

We believe that core internal revenue growth is the best measure of the underlying health of our business, and we expect to sustain solid performance on this front in 2009.

While core revenues will remain strong, we're planning for pressure on complementary revenues which will constrain our overall internal growth to 5 to 7%.

This outlook is consistent with our preliminary outlook for 7 to 9% growth shared at Investor Day, adjusted for the record downturn in recycled paper pricing experienced since October.

We estimate that changes in commodity prices will reduce our overall growth rate by 2% this year.

The 10 to 20 projected decline in complementary revenues also factors in impacts from the recent completion of a large public sector project in Europe and expected pressures on more discretionary revenues in the current economic climate.

To put this in context, the 10% to 20% decrease in complementary revenues equates to approximately 40 to $80 million of revenue reduction for our $3 billion Company.

As we've noted many times in the past, complementary revenues do fluctuate in our business; but we want to reinforce that this represents a smaller part of our overall revenue base.

Combined with the estimated 7% impact from the record strengthening of the US dollar in the second half of 2008, we're projecting reported revenues to be flat to down moderately in 2009.

Let's spend a moment reviewing the impact of commodity prices and foreign exchange impacts, as these effects will be greater in the first three quarters of the year.

As we discussed, we've seen some dramatic changes in factors such as recycled paper pricing and foreign currency exchange rates in recent months.

At current rates, these factors will combine to lower reported revenue growth by 9 to 10% in 2009, with greater impacts in Q1 through Q3.

In terms of recycled paper pricing, the October to December 2008 timeframe saw the fastest, deepest decline in the recorded history of the paper market.

Market pricing for sorted office paper dropped from levels in excess of $200 per ton for much of last year, to below $90 per ton recently.

As shown on the left hand chart above, we generated over $90 million of revenues from recycled paper sales last year during periods when average market pricing was in excess of $200 million per ton.

At current rates, we expect that commodity price changes -- including lower fuel surcharges -- will lower overall revenue growth by about 2% this year, with greater impacts in the first three quarters.

Foreign exchange changes will also have a more significant effect on reported growth in Q1 through Q3, with negative impacts in the 8 to 9% range.

It's important to reinforce that FX movements don't impact the underlying fundamentals of our business.

As a service business, our revenues and costs are aligned in international markets, and we continue to target solid underlying operating performance.

As we report our performance in 2009, we'll enhance our use of cost and dollar growth rates to highlight our underlying operating trends.

Let's now turn to Slide 15 to review our internal growth projections by business segment.

Slide 15 highlights our expectations for internal growth rates across our three business segment.

For our North America Physical segment, which finished the year with an 8% internal growth rate, we're expecting 2009 internal growth to be in the 5 to 7% range.

This outlook reflects consistent performance in core revenue growth supported by solid storage revenue gains.

These gains will be moderated by soft complementary service revenues, including impacts from lower recycled paper pricing.

For our International Physical segment, we're projecting internal growth in the 4 to 6% range.

2008 was a good year in International, supported by solid growth rates in core revenue, partially offset by pressures on complementary services due to the completion of two large projects.

We'll still be working through some comparisons to these project revenues in early 2009, which will lower growth rate for the year by about 2%.

Similar to our North America business, we're targeting strong core revenue growth rates in our International operations, building on our solid momentum in these markets.

Finally, with respect to worldwide -- the worldwide digital segment we're targeting an internal growth rate of 7 to 12% this year.

While we expect a solid growth contribution from our expanding e-discovery business, we are calibrating our new business growth expectations for digital in the current environment.

Given pressures on customers' IT budgets, we're planning for softer performance in areas such as software license sales contributing to our moderated growth outlook.

Slide 16 incorporates these projections into our overall guidance for 2009.

Slide 16 summarizes our full year 2009 and Q1 outlook.

As noted, we're targeting 5 to 7% internal revenue growth overall with flat to moderate declines in reported revenues, reflecting the estimated negative 7% impact from foreign exchange changes.

With respect to OIBDA, we're targeting 8 to 13% constant currency growth.

In 2008, primarily due to a softening vehicle resale market, the residual values of our vans and trucks declined to a level where certain vehicle leases that previously met the requirements to be considered operating leases are now classified as capital leases upon renewal.

As a result, included in OIBDA in 2009 is $21 million of reduced rental expense.

Offsetting the reduction in our rent expense are increases in our depreciation and interest expense.

As such, there will be limited impact from this change to net income.

Our capital expenditures of approximately $420 million include $20 million for the White Hart Triangle real estate project in London, and $15 million for new capacity to store compliant federal records in the US, which is a key growth initiative for us.

For the first quarter, we're projecting revenues of 710 to $730 million and OIBDA of 170 to $180 million.

We expect greater pressure on reported results for foreign exchange changes and year on year complementary revenue pressures in Q1, which is factored into this outlook.

Turning to Slide 17, you can see our expectations for the P&L below the OIBDA line for the full year 2009.

As discussed, both OIBDA and D&A plus interest have been increased by approximately $21 million as a result of our vehicle leases now being classified as capital leases.

We're expecting our structural tax rate to be 39% for 2009.

As noted, we expect to see continued variability in the effective tax rate related to FX changes and other discrete items such as FIN 48 interest, tax audit activity and changes in tax laws or our tax reserves.

As discussed earlier, FX changes impacted our 2008 EPS by $0.34 per share.

We also saw a $0.02 per share impact in 2008 from net losses and asset dispositions.

Our expected 2009 EPS assumes no impact from future FX changes, discrete tax items or asset dispositions.

In terms of free cash flow, we intend to build on our strong 2008 performance, with goals for free cash flow before real estate and acquisitions of 130 to $170 million.

In summary, 2008 was a solid year, as disciplined management and strong execution drove to a successful achievement of our financial objectives.

Our business fundamentals are solid, and we expect to build on those results in 2009.

We have a strong balance sheet, and we've very well-positioned from a liquidity perspective to fund our objectives.

Thank you, and we'll now open the phones to take your questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Ashwin Shrivaikar with Citi.

Hey, guys.

Good morning.

I wanted to ask about pricing on the storage side.

Are you seeing any pushback on getting the roughly 2% effective price increases in this environment?

And to what extent is that in your internal growth guidance?

It's in our projections, Ashwin.

I think fundamentally what we're -- the way that we're going about doing this is really very surgical so that our customers recognize it as a function of investments that we've made.

It's really in our value proposition.

We've been investing aggressively.

If you go back a few years, we talked about the need to invest in security and how we were making those investments, and that we weren't going to realize value to them until the investments were in place.

It wasn't a competitive issue, right?

We were already more secure than our competition.

It was a market requirement.

So we tied it very much to the investments that we're making, and we're really not seeing any material pushback because the markup on those is very slight if you're an individual customer.

Okay.

Got it.

And Bob, you mentioned your presence in the healthcare segment in your prepared remarks.

Yes.

Maybe it's too early to do this, but it might still be worthwhile if you could either size or qualitatively address the potential impact of healthcare record conversion, specifically with regards to what was laid out in the Obama stimulus plan?

Well, there is a great opportunity there.

You know, we have -- we've really bulked up the business in the last couple of years and now have a dedicated focus.

There's a tremendous amount of opportunity.

We have a strategy in place to go after that, but we're still relatively small compared to the market opportunity; and as we go forward, quarter in quarter out, we'll describe how we're advancing that strategy.

But there's a lot of business to be had there over the medium to long term.

Okay.

Thank you.

More to come, I guess.

Good quarter.

Thank you, guys.

Thanks, Ashwin.

Thank you.

Your next question comes from the line of Vance Edelson with Morgan Stanley.

Okay, thanks a lot.

Just back on the 20 or $21 million for switching to capital leases, I just want to make sure that that is baked into the '09 EBITDA guidance; and therefore, if we wanted to be apples-to-apples on an accounting basis with '08 we would just lop $20 million off the guidance range, right?

Yes, that's accurate, Vince.

I tried to highlight that in the comments here.

So the 8 to 13% growth includes about 3 points of benefit from that change.

It won't have a change -- it won't have a net impact on net income or EPC because we'll have offsets on the depreciation and interest lines.

Got it.

And sort of a bigger picture question, on the cross-selling progress, can you give us a feel for how many customers maybe on a percentage basis are taking multiple services, how many are just taking one core service and so forth?

Thanks.

We continue to make steady progress on that, Vance.

I don't have the stats to break out for you this morning.

We've made a lot of progress in cross-selling our customers.

I would tell you that relative to our past, we have improved relative to our potential.

I see a tremendous opportunity in improving our go-to market effectiveness -- again, over a long period of time.

Okay.

Great.

And you mentioned deferring some data center CapEx into '09.

When you look forward, based on what you plan to accomplish in '09, would that be the bulk of what you plan to spend, say, over the next two to three years in that regard?

Or would the '09 data center CapEx be a good run rate for 2010, 2011 and so forth?

Yes, I think it's more the latter.

We're going to be continually investing in growth capital to support the Digital business; and I think we try to highlight some of the more discrete items that are impacting the '09 number, which are the investment and rationalizing our London real estate and an incremental investment and a great growth opportunity, which is around compliant federal records.

But I think our underlying growth rate, we're very pleased with the progress we're making on improving efficiency and are looking to sustain that going forward.

Okay.

That helps.

Thanks.

Thanks, Vance.

Your next question comes from the line of Andrea Wirth with Robert W.

Baird.

Hi, gentlemen.

Good morning.

Wonder if you could address a little bit what you're seeing with your customers in the financial sector.

On your last Analyst Day you had talked about how you actually thought all the turmoil in the financial sector would actually -- could actually be a net positive for you.

Could you talk about, are those customers still growing in line with your core business?

Are they lagging, or are they actually growing a little bit faster now?

Our storage remains very solid.

We are seeing pressure, Andrea, on discretionary projects, right?

So there are some deferrals as it relates to imaging projects and new endeavors.

But in terms of our underlying business, it remains very solid.

I do believe we'll be a net beneficiary over time, simply because regulations will proliferate.

Risk has to be reduced.

Cost has to be reduced.

That is our value proposition.

But right now, it's a fairly distracted sector.

The good news is, you know, our -- the core business is fine.

And then just a quick question on fuel.

Could you remind us what fuel is as a percent of your costs?

And then when you look at -- I think you had mentioned commodity costs in total will have about a 2% impact.

I'm assuming the vast majority of that is paper, but could you break that down between paper and fuel?

Yes.

No, our energy costs, as we talked in the past, are about 3% of revenues.

About half of that is related to transportation and half of that is related to utilities in our facilities.

You're correct, when we talked about commodity pricing, we realized a benefit this year, probably a little south of 1% of our overall revenue, from higher fuel surcharges.

That's changed quite a bit; and as we look forward, we're anticipating lower fuel surcharges next year, so that 2% impact number is a combination of paper and lower fuel pricing.

I just want to -- fuel surcharge pricing.

I do want to highlight that the net impact of changes in energy costs are somewhat neutral for our business in that the fuel surcharges are intended to offset changes in transportation energy costs; so we, net, net, don't see a significant impact on that front and we would anticipate seeing some benefit on -- hopefully on the utility side over time that will support our gross margin outlook.

But the profit impact from the fuel changes is less significant for us.

Just one final question.

Just what was the overall pricing contribution to revenue this quarter?

We don't break that out for our Company.

What I would say is overall, because we obviously sell a variety of different priced products and services globally, we have highlighted in the past the trends on our records management storage pricing; and as we finish this year, on a year-over-year basis, our run rate is -- we're up about 3% year on year, which is where we were hoping to get to.

We think that's a good level and that is incorporated into the growth outlook that we have for next year, and we feel very good about our ability to sustain that kind of value proposition.

Thank you.

Nice quarter.

Thank you.

Your next question comes from the line of Kevin McVeigh with Credit Suisse.

Great.

Thanks.

Hi, Kevin.

Hi, how are you?

Real nice job.

I was wondering, given the headwinds against commodity costs in the fourth quarter, you saw real nice margin expansion overall.

Could you kind of just help us understand what some of those incremental drivers were?

Well, you know, in a couple different factors in the gross margin line, we've -- Bob talked about this in his comments, but we've really been driving excellent performance this year in our North American business on a number of fronts.

We just spoke to to some enhancements to our pricing trends, productivity initiatives helped to aid -- improve storage margins, the efforts we're putting against transportation improvement, work flow improvement are helping with our labor efficiencies, and on the gross margin line, those are all fellow contributors.

And as we highlighted earlier in the year, we've -- our overhead costs early in the year were really driven by acquisition integration more than anything, as well as some investments we initiated late in 2007; but we've been executing a very disciplined approach against our investments and cost management this year, and we saw the benefit of that in Q4 with a moderated growth rate.

So I'd say it's a --

We're tracking the business real hard.

Yes, so it's a -- this business has a lot of potential, and we've been using this year to get very focused on organic execution and it's paying off.

And we're looking to build on that as we go forward.

Great.

And then the CapEx shift from incremental data center moves, how much was that out of '08 into '09?

It's roughly $10 million.

Okay.

We just wanted to highlight, we obviously have a -- came in at a much lower number than we were forecasting a few months ago and just wanted to highlight that as one of the factors driving that improvement.

Great.

Thank you.

Your next question comes from the line of Andrew Steinerman with JP Morgan.

Hello, gentlemen.

I wanted to talk about the margin expansion that's implied in 2009 by clipping your revenue growth by 2 points and keeping your EBITDA growth at the 8 to 13%.

Obviously, you're counting on some margin expansion here.

Could you talk about, do you think you'll see it more on the gross margin line, SG&A leverage?

What gives you confidence in your ability to produce margin expansion here?

Yes, and Andrew, just want to build on an earlier question from Vance.

Keep in mind that about 3 points of the gain is related to that vehicle lease change, so if you peel that out, our internal growth is 5 to 7 and our implied cost of dollar OIBDA growth is 5 to 10.

So it's moderate margin improvement.

We have a couple of different dynamics going on.

We expect to sustain solid gross margins as we work into next year.

There will be some impacts, obviously, related to the changes in recycled paper pricing.

That's something we believe we can address over time; but in the short-term, that's high margin revenue that will decline, and so that is offsetting that a bit.

And so net-net, we're looking to sustain our gross margins and we think that will be the source of our margin improvement as we move forward.

On the SG&A front, we're looking to sustain our revenue growth roughly in line with our -- or I'm sorry, our cost growth roughly in line with our revenue growth and apply a balanced approach there, and I think that was a -- the key point Bob was reinforcing in his comments was that we're driving efficiencies but we're also looking to invest in the future of the business as well and do that in a balanced way.

And the strategy is the same strategy, Andrew, that we've had in place for years, right?

I mean, we are repetitive with focusing on growth, returns and our three phases; but it pays dividends when you stay focused on that same strategy for a long time.

Andrew, we feel very good about our ability to put forth numbers that imply a profit growth at or above the rate of revenue growth, despite some of these factors that we're highlighting on things like recycled paper.

We're very committed to improving the underlying returns in the business.

Right.

And did you have to change anything over the last cup of of months to achieve that -- particularly I'm talking about the gross margin line?

Or is this what you had been planning ever since kind of late 2008?

I would say reflects plans that we've had in place since 2007 that we've been executing against.

We've been -- the last few months, clearly, like any Company, we've been revisiting our investment plans to make sure they're aligned with our growth outlook, and we're getting tighter about that.

But I think we're --

We already had the discipline in our operating rhythm.

But yes, we've become more and more disciplined in light of the conditions that we see and the pressure on the complementary revenue.

Sure.

Okay.

That sounds very responsible.

Thank you so much.

Thanks, Andrew.

You're welcome.

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

Talk about your acquisition thoughts.

You sound like you're sort of hunkering down and not really looking to buy a lot of stuff.

If you don't make acquisitions, would free cash flow go up even with the little lump in CapEx?

And is that CapEx number sort of set in stone, or might it tail off as the year moves along -- as it looks like it did late last year?

Ed, I'm afraid I'm the one that used the phrase "hunkering down".

I was really describing our customers as it relates to new purchases.

We are in no way hunkered down.

I wanted to -- I want to impress upon the listeners that we are very aggressive and intent on expanding our business and our growth agenda, and that will include some acquisitions, especially as we see some shakeout in the environment, where we expect prices to become cheaper.

We don't expect -- you know, we are post the acquisition phase in our core North American business and in our core business in general.

Most of what we do internationally is through joint ventures.

And that really leaves us focused on where there are opportunities for us to add to our platform from a DMS perspective and a digital perspective.

We're not feeling particularly -- we don't feel the need to move right now.

We think the market is coming to us.

We'll be very careful about watching our targets; and it's -- you know, if you look at our past from a DMS or from a digital perspective, we generally have existing partnerships with people that where we look to expand or deepen that partnership, so you can -- we generally telegraph these things, just by who we partner with.

You have Stratify, which is sort of a one note play in the discovery business.

Is that an area that's ripe to be rolled up in a sense, but sort of expand -- I guess in that business, you expand laterally, I suppose -- in the e-discovery business?

I think you're right, that there opportunities laterally.

We do see -- what we have with Stratify is legal discovery services as a platform play, though, and that is why it has gotten the attention of Price-Waterhouse-Coopers and Navigant.

But you're correct to think that there is lateral expansion opportunities; but some of that is organic, right?

We have a tremendous amount of intellectual property in that business, so some of our expansion there will happen organically.

But there will be -- we expect to shakeout in that business, too.

It's a smaller, fragmented market.

Yes.

And I wouldn't expect prices to run away on us.

If anything, they'll come to us.

Okie-doke.

And on the CapEx question?

I'm sorry?

The CapEx, (inaudible), it is jumping up in '09 over '08.

Is it going to go back to that 13% of revenues or is it likely to sort of trend down going forward?

Well, I'd take a step back and say that '09 at midpoint of our guidance is basically 12 to 12.5%.

Okay.

CapEx, excluding real estate as a percentage of sales, which is --

Lower, yes.

We actually exceeded our targets in driving capital efficiency in '08.

And so I would -- there are some increases that are discrete to kind of growth and rationalization investments we're making; but we're -- I believe combined, we're $110 million below the combined '08 and '09 capital guidance we shared at Investor Day, so we're driving a lot of capital efficiency right now.

Thank you very much.

Thank you.

Your last question comes from the line of Franco Turrinelli with William Blair & Company.

Can you hear me?

Hi, Franco.

Hi, Franco.

I want to kind of go back to one observation, which is the American -- North America business is performing it seems exceptionally well; but it feels like we've sort of been talking about Europe or the International business getting fixed for some time, and I guess I'd like you to go back over some of the things that you're doing specifically to improve the performance of the International business and when we might see some improvements there.

Sure.

So, it does take time.

We have been talking about it for some time.

Just to give you some perspective on it, we've essentially upgraded the entire management team across our European business in the last two years; put in infrastructure relative to reporting systems, as well as just some of the productivity initiatives that we've actually been doing for years in North America, and where you're seeing the gains from that, we've been putting them in place over the last couple of years.

And because it's a -- it's really three different groups of businesses, right?

You've got joint venture partners, you've got small acquisitions in countries where we're still subscale, and then you've got the large businesses in Australia and the UK; and so we think about them in three different clusters and how we manage those.

I feel very good that we're positioned in the UK and Australia, where you'll start to see the return improvements.

It takes longer with our joint ventures and our smaller country positions just to get to the scale issues.

But you know, we do have a long view on this, Franco, and we believe that we can pursue North American-like returns over time.

But it is taking time, and it is taking a little longer than we thought a few years ago; but I -- I'm absolutely confident that we'll get there.

Just on the growth front, though, are there some fundamental differences take that we should be aware of, either in the growth of records from existing customers -- which is obviously a big part of the US business' growth -- or pricing or other things that we should understand from a growth point of view?

Well, from a pricing perspective, I think some of the dynamics are the same where we have significant competitive advantage; and where we have bulked up presence in these large markets like UK and Australia, we have that competitive advantage.

It doesn't exist to the same extent where we have a very small presence.

The other opportunity that exists internationally is that there -- for helping customers with what's inside the box, which is how I describe our Document Management Solutions business, this will be a bigger part of our growth going forward.

And we feel that it is very much built around being the custodian of the information, and that there's a -- our value proposition resonates on a worldwide basis.

It's harder to do where you have very small presence.

So scaling those areas is critical to us; but in general, I think you can see us pursue over time the kinds of returns that you're starting to see out of North America.

Thanks, Bob.

Thanks, Franco.

Well, thank you all for your time and attention today.

We're sorry that we ran a few minutes over, and we hope that you have a good rest of the day.

Thank you.

This concludes today's Iron Mountain fourth quarter 2008 earnings webcast.

You may now disconnect.