鐵山公司 (IRM) 2009 Q1 法說會逐字稿

Good morning, my name is Sandrell and I will be your conference operator today.

At this time, I would like to welcome everyone to the Iron Mountain first quarter 2009 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions).

I would like to turn the call over to Stephen Golden, Vice President of Investor Relations.

Please go ahead, sir.

Thank you and welcome everyone to our 2009 first quarter earnings conference call.

After my announcements 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 will open up the phones for Q&A.

Now that spring has officially sprung, we will be getting out just a bit.

We will be appearing at the conference Bank of America one-on-one conference in New York in about two weeks followed by the Citigroup conference, one-on-one, in Boston at the end of the month.

In June, we are presenting at the William Blair conference in Chicago.

On the credit side, we will be presenting at the Deutsche Bank European leverage conference in London in mid-June.

We are looking forward to seeing many of you at these events.

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

Referring now to slide two, 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 and free cash flow before acquisitions and investments are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

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

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

Thank you, Stephen.

Good morning, everyone.

I hope you are doing well.

Since we just recently had our year-end call, this will be more of an update on the performance than a revisit of the long-standing strategy.

I am going to highlight our business performance in first quarter and touch on the segments.

Brian is going to cover our financial performance in detail, review our full year guidance and then afterwards, we will both take your questions.

A couple of key things I want to get across to you this morning.

The first is we are off to a very good start and our business is performing as expected.

While reported revenues were down 3%, including FX impacts, on a constant currency basis, we are up a solid 4%.

Our core internal revenues were up a strong 7% and as a reminder, these are largely recurring revenues in a business that represent 88% of our sales.

They are a key indicator of our business health and they are tracking well.

These gains off-set pressures that we expected on complimentary revenues which remain impacted by economic conditions.

The second key message I want you to hear is that the environment is tough.

We are facing some unfavorable macro factors but we are managing well.

We are delivering strong financial results benefiting from disciplined management and focused prioritization.

OIBDA grew 12% and we exceeded our first quarter expectations while strengthening our cash flow and balance sheet.

We believe we are on track to deliver against our full year financial objectives and raising the OIBDA guidance to reflect our strong first quarter performance.

I do want to pause and reinforce that we manage to the full year, not quarterly results.

While we are pleased with our strong profit performance in the first quarter, we intend to continue investing against our growth potential and believe our updated OIBDA outlook for the full year reflects an appropriate target range for the amount.

Before I review some key areas in the business, let me comment briefly on market conditions.

It remains tough out there but consistent with the expectations that we set for ourselves and have set with you.

We are seeing pressures in the areas that we expected to see pressure.

Special projects are pressured, software license sales are pressured, both film and services are pressured.

We are seeing pressures from factors such as foreign exchange and low paper pricing.

We expect these impacts to continue and we will continue to manage them in a disciplined way, prioritizing our focus, prioritizing our investments but we are managing them well.

And despite these pressures, I just want to reinforce that we have a highly resilient business.

We are performing well and are very focused on the right investments.

Our customers, it is worth noting, need us whether times are good and bad.

We are in the business of providing information management services and the mega trend that we follow is one of information growth.

Information growth doesn't go on recession.

All of our solutions, every one of our solutions across all of our businesses focus on lowering cost so our business remains strong.

Let me review our progress across the business segment starting with our biggest invest business, North America.

North America, as you know, is strategically driven by growth and returns.

The team continues to improve their execution, they have solid core growth in the quarter and exceeded their bottom line targets.

They have key wins that are worth noting.

One was one of the largest transportation companies in the world that wanted to look at the rich heritage and all of their files went back to a 180 year history and how we could help them convert those back files and manage their records on a go forward basis to capture them, convert them and store them appropriately for their those vital records and the decision to work with us on this massive project really came down to the chain of custody in the investments that we have made in security over the years.

You can see us getting value for throughout the business today.

Another key win for us was with Principle Financial Group.

Like many customers, Principle is an existing customer but they chose to insource some of their records management.

Having worked with us over the years and spending time with us in the first quarter we were able to convince them that what they were doing in-house we could do for them less expensively and more securely resulting in an awful lot of business coming from them both in terms of recurring revenue and special projects.

We also made progress in the government sector during the quarter.

This is something that we have been signaling for a few quarters now.

We anticipated changes in regulations as to how you store federal records.

Whether you are a government agency yourself or you do business with the government, there were deadlines that are approaching around how you have to store that.

We anticipated that and built nearly two million cubic feet of space that is under development and we have got over a third of that space already booked and we expect to add more facilities as that market demand reveals itself.

So a lot of good wins from a growth perspective.

As you know, this is a balanced agenda we have with North America so we remain focused on productivity.

It is the same productivity initiatives we have been talking about for years so when we talk about work flow optimization, internally we refer to it as work center optimization and think about as to what we do inside the building to be more productive.

Transportation optimization, think about that as what we do outside the building.

We do a lot of management training, and it is all focused on moving from market to market and we are realizing big savings as we move from market to market.

We also chose to work with some best-in-class partners from an infrastructure perspective during the quarter, having reached an agreement with Jones Lang LaSalle to help us with real estate administration and salesforce.com to help us with our sales force automation.

The most important thing I want to get across to you is that we continue to improve in how we invest in capital and it is showing in our results.

We are being very sharply focused, a little bit more centralized than we have been in the past and it is showing in the results.

Bottom line, though, is that North America is doing a great job.

So let me moved to international.

Brian and I came back from a review of the international businesses and again, the team is executing well on their strategy.

of driving North American-like returns in established markets like the UK, investing in sales and facility capacity in expanding markets like Latin America and continental Europe, and an coinvesting with JV partners in emerging markets like Russia and Turkey.

During the quarter, core revenue grew 6% supported by solid storage growth in Europe and continued gains throughout Latin America.

International leads are DMS innovation and has moved further up the value chain with our customers taking over processes that range from from credit card applications to cell phone activation to invoice tracking systems.

Now overall during the quarter, international progress was constrained by the expected end of a big project and the foreign exchange pressures you are aware of.

I am pleased, however, with the momentum that is building between and amongst the leaders and their businesses in the international segments.

I expect that our investments in selling resources in management capability will result in continually improving performance with returns that approach those of North America.

Let's moved to Digital.

This is a business where we are focused on growing the business and building out a platform as a long term driver of growth.

Our Digital business made a lot of progress in the first quarter mainly through new product releases, new partnerships and the continued strong performance of Stratify.

Now new book bookings are down and big license deals are off as we had expected them to be.

It is harder to sell technology and it takes longer in this time.

Having said that, new product releases, we did release a product that we first signaled to you on investor day last year.

Virtual File Store which essentially stores inactive digital data in our digital vaults.

Think of it, it is really the box business for digital data.

We announced a partnership with Microsoft around CloudRecovery.

When you are using Microsoft's data protection manager and you want that information protected offsite, it comes to Iron Mountain's digital vaults.

A key win during the quarter was with one of the top financial institutions in the world and this is really a function of our Stratify solutions where they were faced with a tremendous amount of litigation around their stock dropping, around subprime litigation, disputes with counter parties and we were able to provide them a solution that gave them a single mass repository with client attorney privilege maintained across all these matters applying a combination of people, technology and process.

This is like no competitor can access 20 million documents on multiple concurrent matters, saving our customers a lot of time, a lot of money and dramatically improving the likelihood of their success in the litigation.

That's a review of the segments and our business.

Before I turn it over to Brian, a couple of key points I want to reinforce, really where I started out.

We are performing as expected, we had a good start and I am confident that we will achieve our targets.

And most importantly, I want you to know that we are determined to extend our leadership for providing information management services and are, of course, committed to extending that leadership within the context of delivering our financial objectives.

We appreciate the support of the customers, our employees and of course, you, our investors and with that, I would like turn it over to our Chief Financial Officer, Brian McKeon.

Thanks, Bob, good morning everyone.

The first quarter was a solid quarter for Iron Mountain.

Our results were highlighted by sustained core revenue, internal growth and strong year-on-year OIBDA margin gains which reflected favorable business shifts and benefits from our enhanced focus on disciplined execution across our business.

Core revenues, which represent 88% of total revenues in the quarter and are a key indicator of the health of the business, grew 7% organically.

These gains offset expected weakness in our complimentary service revenues.

The strengthening of the US dollar against foreign currency lowered reported revenue and OIBDA growth in the quarter by 7% and 9% respectively.

Similar to Q3 and Q4 of 2008, exchange rate changes during the quarter required us to recognize charges and other expense in our book tax provision which lowered our reported EPS by about $0.06 per share.

These factors, however, don't alter the fundamental soundness of our business.

Our Q1 performance provides a solid start to the year and based on these results, we are raising our OIBDA outlook for the whole year.

We are also making favorable revisions to our CapEx forecast.

Today, we will review our quarterly results and provide an update on our cash flow performance, capital spending, and our current debt position.

We will also provide an updated perspective on our 2009 guidance.

Slide four highlights the key messages from today's review.

As noted, Iron Mountain delivered strong financial results in Q1, supported by healthy core revenue performance.

Core internal revenue growth was 7% with solid gains across our major business units.

As expected, pressure on complimentary service revenues and impacts from the substantial strengthening of the US Dollar over the last year constrained reported revenues.

Despite these impacts, we drove strong OIBDA performance ahead of our expectations, benefiting from year-on-year gross margin gains and overhead cost leverage in Q1.

We delivered solid OIBDA growth despite negative impacts from FX, which reduced reported results by 9%.

We also continued to improve our cash flows and strengthen our balance sheet.

We are on track to deliver record cash flows this year which is supporting continued improvement in our liquidity and leverage ratios.

In terms of our outlook for 2009, we are reinforcing our full year revenue guidance.

As a result of our strong Q1 performance, we are raising our full year guidance for operating income and OIBDA..

In addition, we have refined our capital spending plans for the year and now expect CapEx to be about $380 million for 2009 in line with controlled 2008 spending levels.

Let's move on to looking at the details of our revenue performance on slide five.

Slide five breaks down our overall revenue growth.

It shows internal growth by major service line as well as the acquisitions and foreign exchange.

From an internal growth perspective, our first quarter performance was as expected with results reflecting some of the toughest comparisons this year.

Based on our current forecast, we expect full year internal growth of between 8% and 9% for core revenues and between 5% to 7% for total revenues.

As noted, we drove solid internal growth of 7% in core revenues for the quarter.

Core revenues, which are comprised of storage revenues and core service revenues, are key indicators of the health of the business.

These revenues are recurring and predictable and represented 88% of revenues in Q1.

Overall, internal revenue growth was impacted by 15% decline in complimentary revenues.

As expected, we saw pressure in Q1 due to the completion of a major European service contract last year that resulted in a $5 million reduction in quarterly revenues.

Lower recycled paper prices also impacted complimentary service revenue in the quarter by approximately $13 million.

Together, these factors caused a 16% negative impact to Q1 complimentary service revenue growth.

We have also seen lower growth in areas such as special projects, fulfillment services and software license sales which are the areas most likely to be impacted by economic conditions.

As we have noted in the past, complimentary service revenue which represented about 12% of total revenues in the quarter can vary over time given fluctuations in demand and timing for special project activity as well as variation in factors such as recycled paper pricing.

Based on these factors, our total revenue internal growth rate was 4% for the quarter.

As previously discussed, reported revenue growth was impacted by the year-over-year strengthening of the US Dollar against all foreign currencies.

Our three largest currencies, the British Pound, the Canadian Dollar and the Euro weakened by 26%, 19%, and 10%, respectively over the last year leading to a 7% negative impact on reported revenues for the quarter.

We will now turn to slide six for the P&L performance.

Slide six compares results for this quarter to Q1 of 2008.

Overall, our revenue performance was as expected with solid core internal revenue growth offset by a decrease in complimentary service revenues and further reduced on a reported basis by the strengthening of the US Dollar.

Our largest segment, North American Physical, posted 4% total internal growth supported by 7% core revenue internal growth.

Core gains were offset by a decline recycled paper prices which along with lower project revenues contributed to a 17% decline in complimentary service revenue.

The weakening of the Canadian Dollar further reduced reported revenue in the North American segment.

Our International Physical business felt the largest impact of the strengthening of the US Dollar as the segments internal growth rate of 3% was reduced by more than 20 percentage points due to FX changes.

That being said, we did see solid core revenue performance supported by strong performance in Latin America and consisting growth in Europe.

As expected, the total internal growth rate was impacted decreased complimentary service revenues including meaningful impacts from the completion of a large European project in 2008.

Finally, our Digital segment posted 6% internal growth, supported by double-digit growth in core revenues and continued solid performance from our Stratify acquisition.

As discussed during our last earnings call, this is a difficult environment for selling technology and we are seeing the pressure on our complimentary revenues, particularly with respect to software license sales.

Productivity gains, particularly in the North America Physical business, helped drive strong year-on-year improvement of 260 basis points in the gross margin.

The higher stored gross margin in the sale of the low margin data products business were also key factors supporting gross margin gains.

Our gross profit benefited from the $5 million reduction of rent expense due to the recharacterization of certain vehicle leases from operating leases to capital leases.

SG&A growth was 1% in the quarter compared to prior year levels, excluding the impacts of FX changes.

This modest growth rate reflects the benefits of overhead cost controls we have advanced and some shifts in the timing of planned investments.

OIBDA was $197 million for the quarter, up 12%.

Included in OIBDA for the first quarter 2009 is $2 million of asset gains compared to losses of $4 million in Q1 of 2008.

Excluding asset gains and losses, OIBDA increased 9% on a year-over-year basis, including 3% from the growth benefit of recharacterization of certain vehicle leases.

OIBDA growth was reduced by 9% due to the strengthening of the US Dollar in Q1 of 2009 compared to Q1 in 2008.

Depreciation was $68 million and amortization was $9 million and slightly below expectations reflecting continued capital spending controls.

D&A grew $6 million versus prior year levels in Q1 reflecting the additional depreciation associated with the recharacterization of the vehicle leases.

Operating income was $121 million for Q1 of 2009, up 14% versus the prior year.

Excluding asset gains and losses, operating income grew 9%.

Moving on with the review the first quarter P&L performance.

Slide seven bridges our operating income to net income attributable to Iron Mountain and EPS results.

Included in today's press release is a brief note on our adoption SFAS 160 regarding among other things the presentation of noncontrolling interest in the consolidated financial statements.

Going forward, we will be using the new term net income attributable to Iron Mountain, formerly net income as required by the new pronouncement.

We will discuss the new change in the first quarter 10-Q.

As discussed, operating income was up a strong 14% to $121 million on a reported basis.

Our Q1 interest expense decreased compared to Q1 in 2007, given primarily by lower debt levels and reduced interest rates.

These gains were off set by impacts to other expense and our effective tax rate from changes in FX rates since the end of 2008.

which reduced net income by $12 million or $0.06 per diluted share in Q1.

We reported net income attributable to Iron Mountain for the quarter of $29 million or $0.14 per diluted share.

As we discussed in the last two earnings calls, 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 Q1, FX drove a net $7 million charge and expense.

We also recorded a $5 million tax provision on these amounts reflecting both foreign currency gains and losses incurred in different tax jurisdictions.

Note that these changes are one time and noncash in nature.

In Q1, the impact of foreign currency rate changes increased our effective tax rate by about 13 points.

Other discreet items such as FIN 48 interest, addition of tax reserves and other adjustments also added a net 2% to the effective tax rate in the quarter.

For the quarter, our tax rate before the impact or foreign exchange rate changes and other discreet items was 39% as expected.

We are currently forecasting our rate before the impact of foreign currency rate changes and other discreet items for 2009 to be approximately 39%.

Let's turn to slide eight to look at our capital expenditures.

Slide eight summarizes our capital spending for the quarter.

It highlights our year-to-date results compared to the full year 2008 amount and our current 2009 which we are lowering today.

Our Q1 2009 CapEx was $51 million including $2 million for real estate.

Traditionally, the first quarter is a light CapEx quarter as some projects are scheduled for later in the year and many require time to plan for the significant expenditures are made.

We scrutinize our capital spending on an ongoing basis and since our last earnings call, we have refined the full year CapEx estimates and now expect to spend approximately $380 million in 2009.

This amount is consistent with 2008 levels in both dollar terms and as a percent of revenues.

We are spending to our revised plan and expect to finish the year on target.

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

We will move on to slide nine and look at free cash flow for the quarter.

Slide nine highlights the year-to-date cash flow performance compared to the same period in 2008.

For 2009, free cash flow before acquisitions and discretionary investments in real estate was $57 million.

Year-end increase in precash flow is supported by higher OIBDA and capital expenditures.

Also included in the cash flows from operating activities is a $15 million realized cash gain on a British Pound hedging contract that rolled over on the first quarter of 2009.

For the full year 2009, we now expect free cash flow before acquisitions and discretionary investments in real estate to be $210 million to $240 million.

This will result in the strong improvement over the 2008 levels and reflecting continued benefits from our efforts to improve profitability and capital efficiency.

Now we will turn to slide 10 to review the debt statistics.

Our focus on cash flow is supporting continued strengthening of our balance sheet and liquidity.

In terms of our debt portfolio, we ended the first quarter of 2009 in a very strong position.

Our weighted average interest rate is down to 6.9% we are 81% fixed.

Maturity is at 6.9 years with no meaningful repayment obligations until 2012.

Consolidated leverage at the end of the first quarter was 3.6 times below the low end of our target range of four to five times OIBDA and well within the 5.5 times covenant limit.

As we discussed in the past, our business will delever in the absence of meaningful deacquisition spending.

With limited acquisition activity over the last year, and benefits from our stronger operating cash flow, we have seen significant improvements in leverage ratios and liquidity.

We currently have over $270 million in cash and $560 million additional bond capacity.

We have a strong balance sheet and are well positioned cash and financing capacity.

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

This concludes the review the first quarter 2008-2009 results.

In summary, we are pleased with the results this quarter both operationally and financially.

Operationally, we continue to make progress in strengthening our core North American business, which is the engine for our financial performance while expanding the International and Digital growth platforms.

Financially, we delivered financial results that is met or exceeded our results in the tough environment while strengthening our balance sheet and cash flow performance.

We will turn to page 11 to review our updated financial guidance for Q2 and the full year 2009.

Slide 11 summarizes the full year and Q2 outlook.

We continue to target 5%to 7% internal revenue growth with flat to moderate declines in reported revenues reflecting an estimated negative 7% impact from FX changes.

With respect to OIBDA based on our Q1 performance we are now targeting 11% to 16% constant currency growth.

As a reminder, included in OIBDA for 2009 is $21 million of reduced rental expense related to our recharacterization of the vehicle leases from operating leases to capital leases.

This change adds about 3% to our 2009 OIBDA growth rate.

Offsetting the reduction in rent expense are increases in depreciation and interest expense and as such, there will be limited impact from this change to net income.

As we noted, we are reducing our capital expenditure forecast by $40 million to $380 million for the year.

For the second quarter, we are projecting revenues at $730 million to $750 million and OIBDA of $210 million to $220 million.

We expect continued pressure on reported results from foreign exchange changes and year-on-year complimentary revenue pressures in Q2 which is factored into the outlook.

Turning now to slide 12, you can see the updated projections for the P&L below the OIBDA line for the full year 2009.

As we just discussed, our new outlook calls for OIBDA in the range of $820 million to $860 million with the expected D&A down slightly to $315 million.

We expect our interest to be moderately lower based on our existing debt levels and the lower interest rates in the current environment.

As a reminder, we don't forecast other income or expense and noncontrolling interest.

So the amounts you see here are the Q1 actual results.

Likewise, with respect to our tax position, we have assumed a 39% structural rate plus the actual impact of the discreet items recorded in the first quarter.

These expectations yield EPS in the range of $0.81 to $0.91 per diluted share, assuming 204 million shares outstanding.

As a reminder, our first quarter results included one time impacts to other expense and our effective tax rate from changes in FX rates since the end of 2008 which reduce net income attributable to Iron Mountain by $12 million or $0.06 per diluted share.

Overall, we believe we are on track towards delivering solid financial results this year.

That concludes my opening remarks and we'll now open the lines for Q&A.

Are you ready for questions.

Yes, we are.

(Operator Questions).

Thank you, your first question comes from the line of Andrew Steinerman with JPmorgan.

Great job on the efficiencies.

I wanted to ask about core storage growth that ticked down to 7% after the previous six quarters have been 8% but you chose to keep your targets for the year 8% to 9%.

Could you just go over your thinking there?

What do you think slowed it one tick in the quarter and what might keep it with a slightly upward buy as for the year?

It is tough for comps earlier in the year.

That's the punchline for this issue.

We did have tougher comparisons, Andrew.

We did have some impacts from some larger destructions in 2008.

The public service contract that we have been talking about in Europe actually had a storage component.

That impacted a bit.

We are seeing some impact from the economy on storage, in the sense that customers have been looking at destruction as a way to save overall costs and that is putting some pressure on the number at the margin but we continue to target that as we work throught the year we think we will be looking at some more favorable comparison and should be able to improve the growth rate.

Sounds good.

Could you give us a word on how volumes are doing in shredding?

The shredding is one area that I was just mentioning the impacts of the economy that we are seeing some factors and effecting core revenues and shredding is one of the areas.

The activity levels have been soft and we still posted solid growth in shedding excluding paper and it was down from the much stronger growth rates we saw last year and that is an area that we are monitoring closely.

We are seeing some pressure.

That sounds fair.

Thank you so much.

Thanks.

Thank you.

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

I am wondering if you could talk a little bit about the SG&A.

Obviously, you did a fantastic job of controlling the cost there and you also mentioned that you saw a little bit of a shift in costs this quarter.

Can you detail a little bit more what the shift was and even try to quantify what it was in the quarter and when we should expect to see it make up later on in the year?

I wanted to highlight some and we had cost and it was the guidance.

And that's principally just related to the strong cost management practices we put in place over the last year.

We had some selected efficiencies.

And we substantially scaled back our national meeting this year.

And we executed an excellent session.

And that was a much more reduced cost.

And gave us some benefits.

We have some select initiatives investments that we are prioritizing.

They are focusing in the DMS gross strategy that we will be initiating as we work through the year.

And we don't have that quantified specifically.

And what you should take away is we will maintain control over cost growth.

And we should have it in line.

That is very helpful.

Can you give us an idea where you are at right now in terms of capacity utilization?

And compare in both North America and international?

We typically just focus on the North American number because we have variability depending on the stage of development and the international markets.

Our building utilization remains in the 85% range and we are actually improving our utilization and much of our system, we have been adding capacity regarding complaint federal records and ahead of growth which is constraining the overall gains but we are hoping to move the number up over time to the 90% range.

The thing I want you to hear, Andrea, we are being very careful to invest in opportunities and prudent on all the costs.

Got it.

Thank you.

Great quarter.

Thank you, your next question comes from the line of Vance Edelson with Morgan Stanley.

Can you give us a feel for the conversations you are having with your customers for their appetite for complementary services once the economy improves?

Are they saying we like the idea, just not now, call us in six months?

Any of that which would suggest the possibility of stronger growth some sometime down the road.

There is, Vance.

You should remember we approach every conversation from the standpoint of lowering costs.

All our solutions are lowering costs.

When the costs are going to be saved over a longer term and we are asking the customer to deploy money and people up front in anticipation of long term cost savings, they are deferring and as things improve, I expect them to defer less.

But, fundamentally, what we are seeing is the big deals are getting smaller and taking longer and whether it as special project or software license or for the fulfillment business.

I would expect it to improve as conditions improve.

We feel good about the business and it is about saving money.

Any updated stats you can provide on the uptake of complementary services, the percent of customers taking two services, the percent taking three?

Don't have an update for you on this call.

On real estate acquisitions, are you getting noticeably better deals than you would have a year ago or are you still holding off?

Our real estate strategy is driven by the need for capacity rather than trying to time the market.

And the key trend we are seeing, it is more related to our international markets and for us to own real estate.

Versus working through partners.

And that's why there is an increased.

And obviously, market conditions are more favorable than they were.

They should benefit us over time.

One last one for you.

You mention the ability to naturally reduce leverage in the absence of significant acquisition activity so perhaps you could update us on the M&A.

Is there a pipeline, so to speak?

Or is it the balance sheet approach you mentioned suggest we shouldn't expect much in that regard?

There is a pipeline.

It is the same that was had for a few quarters now.

We want to be careful about forming commercial partnerships.

And think about acquiring.

It is focused on Digital and selective international expansion.

And we are being very prudent right now.

And we don't feel the market running away from us by any means.

Thanks a lot.

Your next question comes from the line of Ashwin Shirvaikar with Citi.

Good morning.

Question I had was with regards to margins.

Obviously a good margin performance but I wanted to ask about the sustainability of the SG&A level and the productivity gain.

As internal growth takes back to the 8%.

And things you are still projecting.

Let me differentiate.

On the SG&A.

Just to reinforce the response.

Expect SG&A to be in line with the revenue growing.

And we are managing that business.

The business in a way that we are prioritizing the investments.

And trying to control the growth.

And negative impact.

And balance that.

The productivity games are supporting the games you see in gross margins.

They are a number of other factors support supporting that.

And favorable the in the business mix.

They are more on lower margin project sales.

And we have improved our storage margins and some of that is supported by the pricing of last year.

And the biggest factor is we are trying across the areas.

And the North American business, the initiatives Bob was highlighting in the opening speech.

On managing the business with a strong emphasis on ex execution.

And we should see the them as we move forward.

The year on year kind of gains will moderate.

We have been doing this for the past few quarters.

We should be able to sustain moving ahead.

That sounds fair.

And one question on CapEx, if I may.

It is the 3rd quarter in a row that you guided down and defined CapEx And is there any geographies.

Or kinds of project.

That is are not making the cut here.

And what is investing and not.

If you can truck on that?

We, it just rely reflects phasing.

And I would highlight That we scaled back.

Elementses.

And still moving forward with that.

And define the estimates.

And how much racking do we need to bring on when.

It is a meaningful efficiency for us and it t is a disciplined approach to how we manage and how we evaluate the things.

It is getting better and better.

Great.

Good it hear.

Thank you.

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

Couple of questions.

Good morning.

First, just following up on the Cap Ex question.

On the pieces that we cut back on.

Should we review that more as a delay.

And be interested in.

Or should the climate pick up.

Best to think about it.

The way to think about it is we are concentrating the investments on the biggest growth opportunities we see.

In building out our Digital platform and select international expansion.

And you know, as things improve, we will continue to look at those investments and how they can pay off.

We don't.

We feel like we have a resilient business and we don't expect the management profile to change as the conditions improve.

We made good progress getting our efficiencies down.

And excluding real estate.

And this isn't about taking a project.

And this is about being discipline.

About what weigh need to bring on news capacity.

And the thing that could spinning our numbers.

It is more if we had significant business opportunity to bring the capacity.

And how they can drive the number.

And some elementses of the capital educations are lumpy by nature.

And if we have the highlight this year.

Big opportunity to returns.

And the sufficiency.

Should be and one thing we hear.

And across the board.

Obviously not specific to your business is the environment lends itself to customers looking to regrowth particularly on price.

What kind of conversations are sort of ongoing if you are seeing that pressure and how the trends are going.

And how to answer the questions.

And everybody else is.

We are approaching each conversation with our and the total goes.

And information management services.

And what they are south sourcing with us.

We can give them practicing and there are many things they can do around.

And which information they choose to destroy.

How they retain it.

And form factor.

And we are able to come out of nearly every conversation saying pure practical ways and successfully manage the price issue.

So, on that basis, presumably holding as far as, I think last quarter.

You commented.

Maybe 3%.

Year-end price.

And increases in growth

We think that's appropriate given the investments we made in the business.

And the level that we operate at compared to our competitors.

And we are committed to helping our customers.

With their cost.

That's banged into that on a sustainable business.

Thanks.

Thank you.

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

Nice job.

Wanted to follow up on the pricing a little bit.

As you think of the competition.

Have they become northbound more aggressively.

But client to client discussions and how you are thinking about that.

Kevin.

It has always been an aggressive set of competitors we feel W and we look across the mountain.

We look at our position.

And opinion factors that is a a general officer.

And there is a lot of competitive pressure.

Having said that.

We have a value proposition that is unmatched by the competitors.

From the smallest attack.

To the largest.

And there is business where we are getting particulared off and we are okay with that.

And it is really.

It is not something that is adversely effecting our overall business.

Our value proposition stands alone.

And we are going to get the value that we think it deserves.

Great, it is helpful.

And the reduction the Cap Ex.

That was helpful and the other components was that on the other side.

And help us understand what that was more.

Those are variety factors and try to see this in the year-end call.

We build a plan.

You know, as we enter the year based on what people believe.

And within our business belief.

We need to execute.

And we get updated estimates from.

And refine those.

As we look at the projects.

And part of our process now.

As we have an approach.

And when do we need to bring things on line.

And that creates some efficiencies.

And some contingencies in.

For some new base opportunities.

And on acquiring some business that is lower than we had earmarked.

And we looked at areas like the UK expansion.

It is not one thing specifically.

I would say the principal through out.

And we are not and we will be as efficient asset gains and losses we can.

Kevin, we are getting better at this.

And the way we think about it this.

Better at it.

That's helpful.

We will try to keep it in a narrow band.

No, that is helpful.

And not to jump on another question.

But the margins are really.

Really strong.

But it as slower quarter, I would think.

So nice job on the margins.

Thanks, Kevin.

You next question comes from Ed Atorino with Benchmark.

CapEx is running 12, 13% of sales.

Is that going to trend down.

Normally.

As you exercise your discipline.

And second, could you talk more about the acquisition landscape.

I can't believe there are lots of exhibits in stork.

And in the Digital arena.

The size of deals you might be looking at.

Can they be handled without necessarily.

Ratcheting up debt.

On your first question.

And I will let Bob respond on the acquisition front.

There are factors that should normally benefit the capital ratios over time.

One is the the chance to grow the services.

And faster rate than storage.

And create capital efficiency and we are seeing some the benefit.

Where in the past.

We were 100% driven and now.

We are getting more of our growth.

Still within a modest growth T and factors like pricing.

And should benefit us over team.

And we feel good about the progress we have driven.

And that's our intent as we move forward.

From a digital M&A perspective.

Remember, there are three platforms.

Data protection.

And ark cave value.

And we seek the opportunity to add to those platforms And right now.

The mark is a small venture and the price is really tough.

We think that will favor us as we rook at those opportunities.

In terms of financing, we start by looking at what we think is a reasonable ledge or range for a company.

And-we are Beau Lee that.

And it is prudent to be in a slower slightly range.

3.5x to 4.5x to 400 nap plasm.

And look for any context.

And we believe that's the right capital structure to the company.

We will look at the deployment for specific acquisition.

National deleveraging would result in the trend downward.

Of expense.

And D&A, they statute to level off.

And bottom line dynamics.

You are seeing some of that.

Yes, we are.

Long time coming.

Thank you.

Your next question is from Scott Schneeberger.

Could you speak a bit to your largest vertical financials services and what type of activity you are seeing good and bad.

Good goes back to my opening comments and in the litigation associated, we have services through the Stratify acquisition, and that we are able to offer that we are actually doing quite well and helping our customers quite a bit.

There is also, as consolidation effect.

It is trying to let them rationalize.

And help them understand what can be destroyed.

And give them practical vice.

In the second tore.

Despite everything they are going through.

It is as expected.

We expected to see.

Obviously pressures on the discretionary fronts.

And that's what we have seen and we have expected to sustain our strong storage relationships.

And customer relationships.

And that is as well.

Some consolidation is going on.

And we are moon imagine ago true there.

Well, we have actually.

Put a lot of focus into healthcare and talk about the medical image archive offering.

And there is a lot of attention coming from the stimulus package.

And moving to the healthcare record.

And the fact that we could help them with that.

And outsourcing.

And the way.

It is building.

And it is over the last year and a half in government.

And we got a third of the capacity already booked.

And as contractors to federal governments start to realize that the constraint that they have to face.

Around how they store things.

And that will be a larger.

And larger business to us.

These are the two.

We feel good broadband.

Any partnerships to capturing stimulus money.

And tag that is independent.

Just a lot of attention going into the sector right now.

And it would be premature for me to talk about how, we are just looking at that in terms of capturing part of the package.

But very early.

Thanks.

Finally, could you give us insight as to how April was progressing.

Through a month activity.

And you alluded to Stratify.

And with picks to there.

And broader.

It is just a matter of policy.

We don't comment on in quarter trends.

And we are comfortable with the out look.

And on tract for good year this year.

Given the time constraints.

We will take one more question.

Okay.

The last question comes from Franco Turrinelli with William Blair.

I am assuming that is me.

I guess.

Let me ask one question.

And I will ask the other off line.

You know, you were talking about the leverage.

And continuing to come down.

And it is now below what you have historically indicated as your level of comfort.

I understand all the interest in doing that for the current environment.

And nevertheless.

It is not clear to me.

And it is the right approach here.

Is your thought maybe to pay down some of the debt or do something else.

And capital structure point of view.

And might be important for us to understand.

As we talk about the future here.

This is obviously impacted by the current environment and maintain flexibility.

And we are operating in an Iowa.

That is outside the normal bands.

And we think it is okay.

And given the certainty.

And we will see investments opportunities.

And in terms of acquisitions.

We want flexibility on the front.

And we will lie light to strengthen the position that is are appropriate.

And they will have and over time we said we would drive the capacity as a company and look at other options as well.

Like returning cash to shareholders.

And we are not anticipating any announcements in the future.

And that is obviously an option that we would certainly consider in the context for being appropriately balanced for an accretion point of view.

Right now.

We think we are okay.

And certainly considering the factors that you are highlighting.

Let me sneak one in.

It is for Bob.

Bob, as I look at the 7% core.

Internal growth rate.

And then I factor in what you said on pricing.

Around 3%.

Then you know, 4% is left.

You know, for growth from volume.

Can you help us think through a little bit what is going on in the current environment.

Are you in fact seeing fewer records.

Coming into be facilities and lower destructions or just, give us some help on the volume side as well.

Before Bob responds.

I wants to clarify one thing.

It is the 3% that we refer to is the North American storage growth rate.

And it is not the stim am math for the company to that.

There is obviously business mix impacts and it is more complicated.

And I wanted to highlight that.

Thanks.

Franco, we see some pressures.

If one bank acquires another, those records.

And there is a lot of layoffs they are dormant for awhile.

As Brian said before, there are customers looking to save over the long term.

And by doing more destructions and seeing high her destruction ability.

And we feel very good about the business in general.

And our ability to drive to the projections we made.

There were tougher comps.

Our projections for storage gains are primarily driven by volume gains and we feel comfortable with the volume gains.

I am sorry.

But that seems like an important comment.

You are saying the projection comments for internal growth are primarily driven from volume gains with price being helpful but not necessary factor?

I wouldn't say.

I would say that our storage, our projections for storage gains globally are principally driven by volume gains.

Great.

Thank you.

And congratulations.

Thank you, everybody.

We appreciate your time and attention this morning.

We look forward to speaking to you again on July 30th.

Enjoy your day.

Thank you, ladies and gentlemen, this does conclude the conference call and you may disconnect.