鐵山公司 (IRM) 2009 Q2 法說會逐字稿

Good morning, my name is Cynthia and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Iron Mountain second quarter 2009 earnings call and webcast.

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

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions).

I would now like to turn today's call over to Stephen Golden, Vice President of Investor Relations.

Please go ahead sir.

Thank you and welcome everyone to our 2009 second-quarter 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 will open up the phones for Q&A.

We certainly had a busy June here this summer meeting with both equity and credit investors and Chicago, London, LA and New York.

We would like to thank you all for taking the time to meet with us and we certainly appreciate your counsel and continued support.

I would also like to ask you to mark your calendars as our 12th annual investor day will be held on Tuesday, October 6, 2009 in New York City.

This year we will be holding the event in the Hudson Theater at the Millennium Broadway Hotel on 44th or 45th.

Stay tuned.

We will be releasing more information as it becomes available.

The best way to stay of informed is to sign up for e-mail alerts at the investor relations page of our website.

Per our custom, with a user controlled slide presentation on the investor relations page of our website at www.IronMountain.com.

Referring now to slide two of that presentation, 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 current report on Form 8-K filed on May 8, 2009 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 DNA or OIBDA and free cash flow before acquisitions and investments, among other metrics, 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 reconciliations of these non-GAAP measures to the appropriate GAAP measures as required by Regulation G at the investor relations page of our website as well as in today's press release.

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

Thanks Stephen.

Good morning everyone.

Iron Mountain's business remains strong.

We continue to deliver solid results and we expect we can sustain good performance going forward.

Our business is performing very well in this recession, as evidenced by the fact that growth is solid and core revenues are expanding with core growth up 6% and internal growth up 4%.

We will be below the aggressive targets we set heading into 2009 but we feel good about the expansion of our business and our prospects going forward, as evidenced by the fact that our bottom line is very strong with OIBDA up 17% for Q2 on a constant dollar basis and 19% for the first half on a constant dollar basis.

As Brian will explain in a few minutes, our cash flows and our balance sheet also continue to strengthen.

As many of you know, our strategy is to optimize our core business while investing in growth.

This strategy is in full force as we manage to achieving our full-year targets.

Let me review the business by segment beginning with our largest and best performing business, the North American physical business.

North America has been working on an agenda of pursuing growth while increasing returns since we integrated the off-site data protection and hardcopy records management business in 2005 under Harry Ebbighausen's leadership, and they're doing a great job pursuing both growth and productivity.

Let me start with the growth front.

We think about growing the business of the North American physical business through vertical segmentation and through the introduction of new services.

I will just describe a few of the key verticals.

Financial services is a very large market for us where there is obvious pressure to reduce costs, but we also have a tremendous amount of opportunity because we continue to help our customers in this sector manage through industry consolidation, litigation and the increasing amount of regulation that they face.

During the quarter we actually landed two nationwide shredding deals in this space, both in the low seven figures on an annual basis.

The healthcare market is also an important market and a large sector for us.

And this is obviously an industry that faces acute records management problems and there is a lot of attention and money going to this market.

We have had a dedicated organization for some time and have a very broad service line across this function.

So whether it is active file management or a person's medical records, all the way through to the image archiving that occurs in a radiology department on an in-sourced or an outsourced basis, we have a lot to offer that industry as it tries to grapple with a very large problem associated with records management.

From a government perspective, this is an area we have been investing for a few years for the dedicated organization.

If you are doing business with the US government today, there is a new set of rules around how you must comply with the storage and protection of information.

Some of that is related to facilities and we have already made the investment in compliant facilities that are beginning to fill up where we feel very good about the potential going forward.

Retail is another segment that we actually got into as a result of entering the shredding business earlier this decade.

And during Q2 we actually won one of the largest retailers in the world with a nationwide shredding win that covers 2000 locations.

Now this is a customer we had won from a records management perspective years ago and represents the opportunity for us to increase our share of wallet with that customer.

So that would give you a sense of how we are thinking about some of the most important vertical segments.

In terms of new services, you heard me talk about DMS for a couple of years now and we've been building up that business.

We had some key wins in North America in Q2.

The National Bank of Canada was faced with new legislation and we were going to help them with an image on demand solution for the workflow that was affected by that legislation, helping them just be more compliant as well as save money.

They have been a customer of ours since 1996 so they knew we were very familiar with how to adjust their workflow.

Navistar is a long-term customer where we had actually noticed a spike in their retrieval activity, and after inquiring about that, found that it was related to a specific legal matter.

We were able to, again, apply our image on demand capability to help them with that matter and are now helping them across the entire legal function.

I do want to be clear, though; make no mistake about it, it is harder to sell these days.

But our offerings our matching up well with the market needs that we see.

Our pipeline continues to expand and we remain sharply focused on growing our core business as a top priority.

We are also focused on optimization of this business through improving productivity.

There are two areas I just want to briefly highlight.

One is record center optimization.

This is where we take a market by market approach to improving workflow.

And by focusing on improving workflow, it has the benefit of producing higher service gross margins, higher service quality and higher employee satisfaction.

We're also focused, as you know, on extracting value for the investments we have made through a pricing excellence program.

And we continue to build systems and processes to sustain pricing for the very long term, so that we can capture value for the investments we have made on a sustainable basis.

So North America is doing well pursuing their agenda of growth and productivity.

That being said, we are seeing some pressure on the margin.

Higher unemployment obviously means fewer employees which results in fewer transactions.

Lower retail sales means fewer receipts.

It takes longer for our shredding bins to fill up, which means less frequent bin tips.

Activity levels in general have moderated.

We also apply some of that pressure ourselves.

We help our customers lower total program cost.

Sometimes that means you will see more destruction volume and this has a dampening effect on near-term volume, but it positions us well with the account for future growth and helps us lower our customers' total program cost.

But even when you take these factors into account, the North American physical business is doing a great job generating higher returns as we pursue a long-term growth agenda and we expect to sustain momentum in this business for the very long term.

So let me move on to the international segment of our business.

I'm very proud of the job the senior team from our international business is doing as they manage and plan the business.

They've done a good job improving the business.

Performance in the quarter was good with internal growth improving to 6% despite the lapping affect associated with a very large project.

Continental Europe is experiencing strong volume gains from the investments we have made in real estate capacity and in building out our sales force.

We landed two large seven-figure DMS fields deals out of France and Germany in the quarter.

Latin America and Asia Pacific both showed double-digit internal growth rates.

And our JVs, which is how we establish ourselves in the most nascent markets, are also performing well.

One to highlight is Russia, where under Tom Keller's leadership just since 2006 we have built out five facilities, have 500,000 cubic ft.

of records under management for 400 customers.

So international continues to improve as well.

Our playbook is to drive the higher productivity from those markets where we are most established, invest in selective geographic expansion and we expect to achieve North American like returns over time.

So, digital.

We are more than holding our own in Iron Mountain digital.

I have been in the technology business for a very long time and this is as tough as I've seen it.

Many of the best and biggest technology companies are going backwards in absolute performance.

Sales cycles are longer, deal deferment is commonplace.

Internal growth for us in the quarter was 4%.

Not bad on a relative basis but it is not what we targeted.

The reason that we are doing -- that we are growing in absolute terms is because it is a trend favored business.

For those of you that follow technology, you know that cloud, if you will, is all the rage right now.

And while it is an overused term, cloud computing essentially refers to -- it is about only using the capacity you need and only paying for what you use.

If you step back, that has been Iron Mountain's business model since inception.

That is how we built the box business.

That's how we built the tape business and that is how we built our digital storage as a service business.

Digital had some key, key wins during the quarter.

One of the largest technology companies in the world standardized on our PC data protection solution for their entire company.

And AT&T continued the rollout of our data protection solutions across Europe and throughout the quarter.

Our new products continue to launch well.

As a matter of fact, our core physical sales force is selling more digital products and is responsible for 40% of the pipeline for Virtual File Store, a solution we've been introducing over the last couple of quarters that takes inactive data off of a customer's primary computer systems and storage systems and stores it in our vaults more securely and cost effectively than the customer could for themselves.

Cloud, if you will.

We continue to benefit from explosive data growth and the brand permission we have to protect others' information.

And there is both a curse and a benefit in IT budgets being constrained.

But it does favor outsourcing, which favors us of course.

So it remains a trend favored business where we have unique competitive advantage, although I will tell you I expect continued pressure in the short term as it relates to selling technology.

As I said before we're more than holding our own.

So that should give you a good sense for how we are managing strong performance across North America, international and digital.

I'm going to turn it over to Brian now.

But before I do, I want you to know that we remain very well positioned to advance our growth agenda while delivering great bottom-line performance.

I look forward to your questions in a few minutes after Brian McKeon, our Chief Financial Officer, concludes his financial commentary.

Thanks Bob.

Good morning everybody.

Q2 was a solid quarter for Iron Mountain.

Our results were highlighted by continued strong year-on-year OIBDA growth in the face of economic pressures that are moderating topline gains.

Core revenues, which comprise 87% of our total revenues in the quarter and are a key indicator of the health of our business, grew a solid 6% organically and offset expected weakness in our complementary service revenues.

As expected, the year-on-year strengthening of the US dollar against our major foreign currencies lowered both reported revenue and OIBDA growth in the quarter by approximately 7%.

The dollar did weaken materially within the quarter which resulted in gains in other income and our book tax provision.

This resulted in an increase [or our] reported EPS of $0.18 per share.

Excluding currency impacts, revenues grew 4% and OIBDA grew 17% reflecting benefits from our continued focus on disciplined execution across our business.

Overall, our Q2 performance was in line with our expectations and builds on the solid start to the year.

We are positive about our business performance and outlook and remain on track towards delivering solid full-year results.

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 additional perspective on our 2009 guidance and the refinements we have made to some of its components.

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

As noted, Iron Mountain delivered solid financial results in Q2 with performance trends similar to those we saw in the first quarter.

Internal growth was sustained at 4% with overall growth constrained by an expected decline in complementary service revenues, including impacts from lower recycled paper pricing.

Core revenue internal growth, while solid at 6% in the quarter, is tracking below our target range as economic factors continue to limit core revenue gains.

As Bob mentioned, service activity levels have moderated, core technology sales are taking longer to complete than usual and destruction activity has increased as some customers implement long-term cost saving initiatives.

Despite these impacts, we continue to deliver very strong OIBDA performance at the high-end of our forecasted range benefiting from records center and transportation productivity initiatives, improved storage margins and disciplined cost controls.

For the quarter we delivered solid OIBDA growth of 10% on a reported basis and 17% excluding the impacts of foreign currency rate changes.

As a reminder, 3% of this growth is due to the initial weak characterization of vehicle leases as we have previously discussed.

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

We remain on track towards delivering record cash flows this year supported by discipline capital spending and have maintained strong liquidity and record low leverage ratios.

The factors driving our profit and cash gains are sustainable and are keeping us on track for strong full-year performance.

In terms of our outlook for 2009, we are adjusting our full-year internal revenue growth guidance to reflect year-to-date trends while refining our OIBDA outlook positively to incorporate our strong first-half performance and reflect current FX levels.

I will speak to this in more detail later in the presentation.

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

Slide five breaks down our overall revenue growth.

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

As noted, our total internal growth for the quarter was 4%, consistent with Q1 trends.

Internal growth in our core revenues was 6% for the quarter.

As noted, these revenues represent 87% of total revenues in Q2 and provide a solid foundation for our overall revenue growth.

While core revenue growth remains solid, economic factors are constraining gains below the 8 to 9% growth range we targeted earlier this year.

Storage growth is being moderated by longer new sales cycles in our digital business.

While physical storage rates have sustained, factors such as higher destruction rates have constrained gains below strong target growth levels.

Core service revenues, which were up 5% on an internal growth basis in the quarter, have also been trending below our goals as activity base revenues have been impacted by the ongoing economic slowdown.

Complementary revenues, which are the most likely to be impacted by economic conditions, declined to 6% organically in the quarter.

As expected, we saw pressure in Q2 due to the completion of a major public service contract last year and from lower recycled paper revenues.

These impacts were partially offset by a large license deal completed in the quarter and the continued solid performance by our Stratify business.

We are planning for economic impacts to continue in the near-term and have adjusted our full-year internal growth outlook to reflect year to date trends.

Offsetting these impacts are more favorable trends on the FX front.

For the quarter the strengthening of the US dollar against all foreign currencies over the last year led to a 7% decrease in reported year-on-year revenues.

However, more recently we have seen a weakening in the US dollar and based on current foreign currency rates, we expect the year-over-year impact of FX to be less than originally anticipated.

We are now expecting a full year negative impact of 5% rather than 7%.

As a result, we expect our full-year reported revenue growth to remain in the minus 3 to 0% range.

Let's now turn to slide six to review our P&L performance.

Slide six compares results for this quarter to Q2 of 2008.

Overall, productivity gains, favorable business mix and disciplines cost controls enabled us to deliver continued strong bottom-line performance.

Our overall revenue performance was in line with expectations.

Our largest segment, North American physical posted 4% total internal growth.

Continued solid core internal revenue gains were offset by the decline in recycled paper prices and lower project revenues.

The weakening of the Canadian dollar reduced reported revenue growth in this segment.

Our international physical business achieved 6% total internal growth supported by strong core revenue gains in continental Europe, Latin America and Asia.

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

Reported growth was reduced by more than 20 percentage points due to the strengthening of the US dollar over the last year.

As noted in previous calls, our international revenues and costs are aligned in local currencies and these changes don't impact the health of our business.

Finally, our digital segment posted 4% internal growth.

Stratify continues to perform well and our Q2 results benefited from in major license win.

Overall digital revenue gains were constrained, however, by pressure on new subscription sales.

Sustainable productivity gains, particularly in our North American physical business, helped drive strong year-on-year improvement of 320 basis points in our gross margin.

Gains were also supported by higher storage gross margins in North America and the sale of our low margin data products business.

Our gross profit and gross margin also benefited from the $5 million reduction in rent expense due to the initial re-characterization of certain vehicle operating leases to capital leases.

SG&A growth was 2% in the quarter compared to prior-year levels excluding the impact of FX changes.

This modest growth rate reflects the benefit of overhead cost controls we have advanced.

OIBDA was $217 million for the quarter, up 10%.

And included in our OIBDA for Q2 2009 is a $1 million asset loss compared to a gain of $1 million in 2008.

Excluding asset gains and losses, OIBDA increased 11% on a year-on-year basis, including 3% of growth from the initial re-characterization of certain vehicle leases.

OIBDA growth was reduced by about 7% due to the strengthening of the US dollar in Q2 2009 compared to Q2 of last year.

Depreciation was $70 million and amortization was $9 million, in line with expectations, reflecting continued capital spending controls.

D&A grew $6 million versus prior-year levels in Q2, primarily reflecting the additional depreciation associated with the re-characterization of the vehicle leases.

Operating income was $138 million for Q2 of 2009 up 11% versus the prior-year.

Excluding asset gains and losses, operating income grew 13%.

Moving on with our review of Q2 P&L performance, slide seven bridges our Q2 operating income to net income attributable to Iron Mountain and EPS results.

As discussed, operating income for the quarter was up a strong 11% to $138 million on a reported basis.

Our Q2 interest expense decreased compared to Q2 of 2008 driven primarily by lower debt levels and reduced interest rates.

These gains were further enhanced by positive impacts to other income and our effective tax rate from changes in FX rates since the end of Q1, which increased net income by $36 million or $0.18 per diluted share in Q2.

As a result, we reported net income attributable to Iron Mountain for the quarter of $88 million or $0.43 per diluted share.

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

In Q2 favorable FX changes drove $17 million of other income.

We also recorded a $19 million tax benefit on these amounts, reflecting both foreign currency gains and losses occurred in different tax jurisdictions.

These impacts are one time and primarily non-cash in nature.

In Q2 the impact of foreign currency rate changes reduced our effective tax rate by about 26 points.

Other discrete items such as FIN 48 interest, changes to tax reserves and other adjustments reduced our effective tax rate by an additional 1% in the quarter.

For the quarter, our tax rate before the impact of foreign currency rate changes and other discrete items was 41%.

This was slightly higher than forecast due to a shift in income due to foreign jurisdictions and higher unbenefited losses in some of our foreign subsidiaries.

We are currently forecasting our tax rate before the impact of foreign currency rate changes and other discrete items for 2009 to be approximately 40%.

Let's turn to slide eight to look at our year-to-date results.

Turning to slide eight you can see that our Q2 results continue the trends we saw in Q1, resulting in a very solid start to the year.

Overall, we continue to drive strong operating profit performance despite economic factors constraining revenue growth.

Internal revenue growth is consistent at 4% supported by solid core revenue internal growth of 7%, offsetting expect the pressures on complementary service revenues.

We are building on these gains through a disciplined approach to deliver strong, sustainable profit results.

Productivity gains and improved pricing in North America are key factors supporting a 290 basis point improvement in gross profit.

Combined with controlled overhead spending, this resulted in a 370 basis point improvement in our year-to-date OIBDA margin.

Net income for the first half of 2009 was $116 million compared to $69 million for the same period in 2008.

The key factors impacting the 2009 results are higher operating income and the impact of foreign currency rate changes on other income and our effective tax rate.

For the first six months of 2009, FX changes have resulted in $24 million of other income including the associated tax benefit.

Combined, these factors have added $0.12 to our year-to-date EPS.

Adjusting both years' EPS results to exclude these factors, comparable in EPS has increased 45% year to date.

Let's shift now to reviewing drivers of our cash flow performance.

Slide nine summarizes our capital spending for the quarter.

It highlights our year-to-date results compared to the full-year 2008 amounts and our current 2009 outlook.

Our year-to-date 2009 CapEx is $116 million, including $9 million for real estate.

Traditionally, the first half of the year is lighter with respect to CapEx, as many of our projects are scheduled for later in the year and many require time to plan and source before the significant expenditures eventually made.

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

As a percent of revenue this will sustain the record low performance levels achieved in 2008.

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.

Let's now move to slide 10 and look at free cash flow for the quarter.

Slide 10 highlights our year-to-date cash performance compared to the same period in 2008.

For the first half of 2009, free cash flow before acquisitions and discretionary investments in real estate was $121 million.

The year-on-year increase in free cash flow was supported by higher OIBDA and disciplined control of capital expenditures.

For 2009 we continue to expect free cash flow before acquisitions and discretionary investments in real estate to be approximately $210 million to $240 million.

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

Now let's turn to slide 11 to review our debt statistics.

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

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

Our weighted average interest rate is down to 6.8% and we are 81% fixed.

Maturity is now at 6.7 years with no meaningful repayment obligations until 2012.

Consolidated leverage at the end of Q2 remained at 3.6 times below the low end of our target range of four to five times OIBDA and substantially below our 5.5 times covenant limit.

As we have discussed in the past, our business will naturally delever in the absence of meaningful acquisitions 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 $315 million in cash and $565 million in additional borrowing capacity.

We have a very strong balance sheet and we are well positioned in terms of cash and financing capacity.

This concludes our review of the Q2 2009 results.

In summary, we are positive about the results 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 our international and digital growth platforms.

Financially we delivered financial results at the high-end of our target ranges in a tough environment while strengthening our balance sheet and cash flow performance.

Let's now turn to slide 12 to review our updated financial guidance for Q3 and the full year 2009.

Slide 12 summarizes our full-year 2009 and Q3 outlook.

We have refined our full-year revenue range to $2.980 billion to $3.040 billion.

As noted, we lowered our internal growth forecast to 3 to 5%, with these impacts offset by an improved outlook for FX [where our] reported revenue growth guidance is in a similar range.

With respect to OIBDA, we're moving up the low end of our guidance range to $830 million, reflecting our strong first-half performance and recent FX changes.

We are now targeting 10 to 14% constant currency OIBDA growth.

As a reminder, included in OIBDA for 2009 is about $20 million of reduced rental expense related to the re-characterization of our vehicle operating leases to capital leases.

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

Offsetting the reduction to rent expense are increases to our depreciation and interest expense and as such there is limited impact from these changes to net income.

As noted, we're maintaining our capital expenditure forecast at $380 million for the year including about $55 million for real estate.

For the third quarter, we are projecting revenues of $760 million to $780 million and OIBDA of $215 million to $225 million.

A couple of factors to note in terms of our outlook for Q3, first, our core service growth will face a tougher comparison given the peak levels of fuel surcharges we saw in Q3 of 2008.

Our OIBDA outlook also incorporates the investment of select project spending in areas such as global procurement to help build on our progress in driving productivity gains.

Turning now to slide 13, you can see our updated expectations for the P&L below the OIBDA line for the full year 2009.

As we just discussed, our OIBDA outlook calls for performance in the $830 million to $860 million range.

Our outlook for D&A is slightly higher at $320 million reflecting FX impacts.

And interest expense remains unchanged from our outlook shared last quarter.

As a reminder, we don't forecast other income and expense or noncontrolling interest, so the amounts you see here are the year-to-date actual results.

Likewise with respect to our tax provision, we have assumed a 40% structural rate plus the actual impact of discrete items recorded in the first half of 2009.

These expectations summed together yield EPS in a range of $0.99 to $1.06 per diluted share assuming 204 million shares outstanding.

As a reminder, our first-half results included impacts to other income and expense and our effective tax rate from changes in FX rates since the end of 2008, which increased net income attributable to Iron Mountain by $24 million or about $0.12 per diluted share.

Adjusting EPS for 2009 and 2008 to exclude these factors, this outlook implies comparable EPS growth of 12 to 25%.

That concludes my opening remarks.

We will now open the lines for Q&A.

(Operator Instructions).

Andrew Steinerman, JPMorganChase.

Obviously a very fine job on the productivity gains.

I want to focus in on Bob's comments that we're optimizing the core while still investing for growth and our strategy is in full gear now.

So, my question basically is, are we investing for growth right now?

Or are we holding back some of those investments this year and which will shift kind of investment spending into next year?

Or do you feel like we are doing the investments we want, we are not holding back and there's not any kind of delayed effect on kind of investment intentions?

We are not bridling the investment profile for long-term growth.

That would be stupid.

I would not do that.

We are absolutely advancing investments.

I think Bob was hitting on the key themes around penetrating vertical segments, new product emphasis and we are able to at the same time [draw] productivity improvements so we can manage that balance and deliver solid bottom-line gains.

We are careful about prioritization.

We are focused on the biggest opportunities and very small opportunities don't get as much attention.

But we are very much focused on long-term growth and we are not in any way bridling investment on the potential of our business.

Okay, thank you very much.

Andrea Wirth, Robert W.

Baird.

Good morning, Andrea.

Why don't we move to the next question?

We can come back to Andrea.

David Gold, Sidoti & Co.

I just wanted to talk or drill down a little bit more on the changes in storage growth, both as the year has progressed and in the forecast.

I think as we look at it I guess over the last couple of quarters we have gone from 8% to 7% to 6%, a fairly good showing in our view given what is happening over there economically speaking.

But a couple of things.

One, I guess just your confidence from here that it truly does hold [a bed here] which is with the guidance seems to imply; maybe you're modestly down.

And then, two, I'm curious -- and this may be a tougher one to answer, but our view has been the first quarter was terrible economically speaking, and the second quarter was a little bit better.

Are we seeing now a little bit of a lag?

Or has it truly maybe slowed a little bit in the second quarter?

David, just in terms of our outlook, our outlook is very consistent with our current trends.

So I think we are -- and I think in terms of your question about how -- and obviously that is a bit below the strong growth rates we were posting coming out of last year and that impacted how we thought about our targets for this year.

But I think our outlook is very consistent with the trends we are seeing.

And I think that -- and they are consistent with the trends we have seen year-to-date.

So, the pressure on activities, levels that Bob highlighted is something we highlighted in our last call and -- (multiple speakers)

It is a tough environment for selling.

And it is driven by the economy.

We do see it settling down.

But I don't see a lot of catalyst for like a sudden resurgence either.

And you should know that our outlook doesn't -- it assumes that current conditions continue.

We are not projecting an improvement.

We think we have the growth rate appropriately calibrated.

We had some aggressive targets heading into this year.

As you noted we're still posting good growth but I think we felt it appropriate to calibrate to reflect current trends.

And just to give you some color on how we think about it internally, we think we're doing a real good job.

No, I wouldn't argue with you there.

And then, one other, the improvement in margin, I guess sort of another -- a different way of asking a follow-up on Andrew's question.

Essentially, can you give a sense of sustainability there?

Essentially, in other words, have we made any changes that are maybe shorter-term that (inaudible) things revert to growth, might not be able to hold?

I want to bridge that back to Andrew's question.

We think about this business as a team for the very long-term.

We have the benefit of a resilient business and we have the benefit of a market that is expanding rapidly as a result of information growth and constrained IT budgets, and we think about the business for the very long-term.

So we are not doing anything to, as I said before, bridle the business for short-term results.

It is just not how we operate.

And that has been the philosophy since we have been a public company and prior to that when I listen to Richard talk about days gone by.

I would highlight one thing, too, which is we are obviously very pleased with the results that we are seeing in areas like productivity gains and things that are supporting our performance.

Those are results that followed investment.

So the programs that we talk about -- transportation improvement, pricing excellence, record center optimization -- (multiple speakers) CFR, those were proactive investments.

We feel very good about that.

I did try to highlight that we are going to continue advancing investments on that front.

We are not launching a big initiative around global procurement as a company.

We will involve some upfront investment where we think has great yield and payback over time.

So, I know -- my sense is that the core of the question is around, are the things we are doing short-term in nature and not sustainable or (inaudible) we are managing the results.

I would say this is consistent with the approach we have been pursuing and highlighting where we are going to continue to invest.

We focus and prioritize and now we drive benefits; that enables us keep [owning that].

A lot of folks inside would say we do scrutinize the investments very closely.

But it is less, so the question was mostly or more about how [we are] thinking about the future.

For instance, presumably even if you didn't bridle back on spend, there are factors in there likely -- let's say like salary freezes -- that when things come back, presumably, you sort of can't hold that.

So just more trying to get a sense for how much of it is a function of the environment, and folks obviously understand salary freezes in this type of environment versus things revert to growth, holding margins here.

I appreciate the question, David.

We're very disciplined in how we manage the business.

We have not frozen anybody's salary and we are being very careful about where we invest.

We're being very careful about what headcount we bring on.

We're being very careful about what projects get put in flight.

But there is no arbitrary, like everybody gets a salary cut or taking -- there is no -- we are not behaving that way.

Terrific, thank you so much and I appreciate it.

Andrea Wirth, Robert W.

Baird.

Just wanted to go back to the guidance and make sure I'm understanding it clearly.

When you think about essentially what you have been looking at for the year, essentially your first half revenue guidance did really come in line with expectations.

So is it fair to say now we are essentially assuming revenue growth stays essentially in line with where we are at right now for the rest of the year?

But what you had been assuming, is that growth -- would actually maybe get a little bit better throughout the year and that is the difference?

Our current expectation is that our full-year growth, our balance year growth is in line with current trends.

I did highlight one factor, which is in the third quarter we're going to be up against our toughest compare on core service.

If you recall, some of the dialogue we have on that, we have fuel surcharges that were basically our position to offset fuel costs.

So we get a benefit in revenue.

And when we have an increase in cost and when the costs come down our revenue comes down.

We will have a tougher compare in Q3 in the core service line.

But effectively our outlook for the balance of the year is consistent with our recent trends.

That is below where we were and that was the -- that is a key news item.

But we think it's a -- we have six months of experience in the current climate and we think that it's appropriate given the trends we are seeing.

Got it.

I wonder if you could give us an update on scrap paper prices.

It looks like they actually did improve sequentially from last quarter.

I'm just wondering how that is playing at all.

Is it enough to really move the OIBDA line at all and is that playing any impact on that number being a little bit higher as well?

We factored in some recent improvement.

It is obviously still well below where it was last year.

We were north of $200 a ton in the market.

We have been trending in sort of the $90 per ton to $100 per ton range.

That has improved to about $110 very recently.

It looks like the calibration of the supply and demand is coming through a bit favorably.

Certainly a supply has come down a lot and some of the Asian demand seems to be holding up okay.

We don't anticipate -- we factored in those kind of levels for the balance of the year.

We are not projecting continued improvement.

So if we continue to see improvement on that front it could yield some benefit.

But it looks a little better but still well down year-on-year.

So you will still see those pressures in Q3.

Got it.

And not to beat a dead horse a little bit, but I guess when you look at your CapEx expectations going forward in terms of the level of spend, should we still assume that -- you know, this 10.8% level when you start looking at least at 2010 initially, do we go below that level for 2010?

Or do we actually go up from there?

We will give you an update on that or a preliminary view at I-day.

Strategically, we are absolutely trying to get that number down over time.

Any given year you can have some movement and we are not prepared to go into the details on that yet.

But we are absolutely trying to bring that number down over time and obviously we have made a lot of progress on that in the last couple of years.

Got it.

One final question, I was wondering if you can give us an update on pricing particularly in North America.

You know we continue to sustain the solid improvements we've seen in the North American records management business and we talk about moving that up into the 3% type range.

And as Bob mentioned, we feel very good about the progress we made putting sustainable processes to achieve that improvement and build on that over time.

So that is a factor that helped our storage gross margin.

It's obviously only one part of our business.

When you look at other parts of our business internationally or in digital, those are principally volume driven businesses.

We are not doing the same type of pricing strategies in every part of our business.

But in the North American records management business we sustain that good progress.

And so you actually were at 3% North America records or you are still working towards that?

In the year-to-date range we were in the 3% range for that business.

I'm a little concerned, just to be open about it, that we have these people with this.

It was obviously -- that is a number that incorporates price and mix.

It's only one part of our business.

But, we have obviously highlighted that as an area of progress and we are in that same type of a range that we had talked about in our last call.

Got it.

Thank you.

That is very helpful.

Vance Edelson, Morgan Stanley.

Within the healthcare vertical, how would you characterize the customers' ability to pay for services right now when hospital administrators are facing tight financials from fewer elective procedures, higher bad debts and so forth?

How is that working out?

We don't see any material change in their ability to pay us, but we can help them because they're not having to outlay capital.

That is where the big trend shifts to us, is that normally if you are a midmarket hospital, you have a choice to either send your patient to another hospital to have imaging services done because you can't afford to buy the storage.

Or you can turn to us and pay-as-you-go.

So it is actually, we feel that is a very strong market for us going forward and we have a lot of untapped potential.

It is a business that builds over time like all of our businesses.

It is a recurring business.

But we will continue to chip away at it and we don't see any degradation from a receivables perspective in that segment.

I think it's an area of focus, not an area of concern.

We are managing that well across the business.

I think Bob highlighted that across all customer segments the sales cycles are longer.

It is a tougher environment to try to get new business.

But we are certainly seeing a lot of interest in the services that we offer.

Okay, great.

And sort of a longer-term question, how does the joint venture nature of the international expansion, when it is a JV, how does that impact the ultimate returns that you hope to see?

Because you mentioned that hopefully those returns will hit the North America levels over time.

Could you give us a feel for that?

They are some of our best business (multiple speakers)

I think the right way to think about it is we have a portfolio of businesses in our international markets.

So the joint ventures are -- they are in the early stages of development.

This is where we are working with partners to build the flywheel for the future.

They are businesses that we anticipate investing and losing money in the early years.

And as those businesses mature and we buy them in over time, I know that is our intent, strategic intent, they get on a track towards higher returns and our goal is to get them to North American like levels.

So I think the right (multiple speakers)

I mentioned Russia, right?

We have been pouring a lot of money into that business with our joint venture partner.

We're not making money on that.

But they're doing a great job building on our footprint.

I think it is important point.

We will always have a degree of a lag in our international returns versus our North American returns because we are explicitly investing in part of that portfolio to build for the future.

But our strategy across the board is that we can build these businesses over time to North America like levels.

Okay, that is great.

Thanks a lot guys.

Kevin McVeigh, Credit Suisse.

Great, thank you.

Bob or Brian, I wonder if you could give us an update on the government vertical and how that has been trending.

I know we have been (inaudible) out there, wanted to get your sense about how trends are there.

Well not unlike other companies, it is slow and steady.

There's a lot of spending going on there.

We think the investments we made in these facilities that will allow us to offer compliant records management to anybody that does business with the government, that market will come to us.

It is hard for some of our competitors to make those same investments.

It is a lot of money in anticipation of revenues as opposed to in reaction to revenue.

But as people become more compliant and as the government insists on that compliance we think the market will come to us.

But like with all of our businesses, Kevin, it's a flywheel.

It builds slowly.

But once it has momentum -- we feel very good about it.

We have a dedicated team down in D.C.

that focuses on the market in coordination with our local teams to focus on state and local governments.

When we think about government, though, we are really focused on the United States government for the purpose of compliant federal record-keeping and we believe we have unique competitive advantage.

They are going to see their information grow and they're going to see their requirements associated with protecting it grow.

And Bob I wonder if you could spend a minute on the competitive environment, obviously as we get deeper into this, on the storage business versus the destruction business how competitors have been behaving?

It is very mixed and can be erratic.

From a storage perspective, I think the industry understands the way we are managing the business and is following our lead.

From a shredding perspective, that is a much more erratic business where we have to choose to decline business against certain competitors used to taking a price perspective and we pass on that business.

So, it is really -- I mentioned the large retailer where we got 2100 locations and the two financial services firms that we won.

So we are winning very large deals.

That is meant to imply there is a bunch of little ones that people are pricing aggressively because they are based with economic scarcity.

And we're passing on that business and focusing where we have competitive advantage relative to chain of custody, relative to our footprint and our ability to handle very large projects with customers that don't focus on the overall cost of the program.

And it is hard to beat us across 2100 locations.

Great, thanks.

Franco Turrinelli, William Blair.

Good morning guys.

Maybe it doesn't even make sense to think about it this way anymore, but when were primarily talking about a physical business, we would talk about new documents coming in from existing customers.

New sales to new customers and then obviously the destructions at the back end.

And again, maybe it doesn't make sense to think about it this way.

But I was really trying to get a sense of which pieces of that kind of equation have really changed relative to your expectations at the beginning of the year.

We highlighted clearly on the -- I think it is right to raise the question.

Our business is certainly a lot more complicated in terms of the different product lines we are in, geographies, etc.

We did try to highlight within the physical business that we sustained solid growth rates that we -- where we have seen a change relative to our expectation, certainly in areas like destructions as Bob mentioned.

That is an area we have seen increases really very much tied to the economic trends.

It was really something that we saw start to increase in the fourth quarter and pick up more early this year.

And that is directly related to customers looking at cost controls.

And us helping them with it, quite frankly.

I would say the sales processes are not dissimilar to across the businesses that new sales are taking longer and that is an additional factor at the margin.

But fundamentally the business is growing and solid.

It is just the -- I think some of these factors are playing in and that is why we are updating the outlook.

Is there a meaningful change in kind of -- I think you have sort of alluded to this a little bit, but maybe you could drill down on it.

Is there meaningful change in the rate of document production you are seeing?

Really just I guess from the employment levels and from overall macro activity.

You talked about it a little but I'm just trying to get a sense for how meaningful that is.

Rate of document production by --

Existing customers.

(multiple speakers)

Just to go back we are continuing to see solid growth in our business and that reflects our business base producing more records.

The factors that are changing at the margin are more related to some of these economic impacts, principally things like destructions and to a lesser degree new sales.

Hey Brian, though, destructions -- I thought the destructions tended to actually push up near-term revenue but take away from future revenue.

Am I still thinking about it the right way?

They do have some benefit in the near-term and -- that's right.

It is something that has been building for a little bit, Franco.

And we are seeing some of those impacts here today.

Does destructions fall in core services?

Yes, right?

Yes.

You have a lot of dynamics.

To your earlier point about the complexity of our business, there are a lot of dynamics in core services.

We lost two points of growth from fuel surcharges.

Activity levels have moderated.

So it gets a little complicated in that dynamic.

We're really trying to highlight the -- as we are looking at our outlook why our growth rates are a bit lower than we had targeted.

Thanks guys.

Scott Schneeberger, Oppenheimer & Co.

Thanks for the color on the verticals at the start.

Could you speak a little bit to what the largest verticals are, perhaps percent of total revenue and how that is different from going back three or four quarters?

Well, we don't break out the percentages but it has not changed materially over the last year.

Financial services, healthcare, legal are our biggest segment.

As a group, the financial services is the biggest.

If you put together professional services, legal, accounting, that would be in a similar range to financial services.

And then obviously you have healthcare is next down the list in terms of just size.

But they are all meaningful large verticals.

We basically do records management across everything.

When I called out -- it's got the segments, government is still small for us.

We see a lot of opportunity going forward.

It's going to take time to build that business but the others are very meaningful businesses for us.

We have not seen a lot of movement in the percentage over the last four quarters.

Thanks.

You mentioned when you are speaking on financial services about litigation activity, regulation activity.

I'm just curious; is that something you are seeing here and now?

Or is that something you're seeing building and think is an opportunity coming?

Both.

So we are benefiting from the litigation that is occurring between counterparties on subprime.

The consolidation with companies acquiring one another within the sector and how we can help them through that.

And we see more of that going forward.

Okay, thanks.

Switching gears a little bit, in digital, how is the competitive landscape?

You mentioned sales cycles extending.

What are you seeing more specifically there?

Just look at the public comps, right?

They're going backwards.

So it's a very brutal environment for selling technology.

We have the -- I am pleased, actually, with the growth.

It wasn't what we expected.

But the fact that our business expanded and it is because -- it again goes back to the overall Iron Mountain value proposition.

Everything we offer as a service is meant to reduce costs.

So it allows us to keep a seat at the table.

But if you are selling technology that is in any way nice to have, it is very tough out there.

When I talk about companies that are going backwards, we are talking about some of the best companies in the technology industry that have sterling reputations.

So we feel we are very much holding our own.

But it is a tough, tough environment.

Sounds good.

And we are to infer that pricing is tough as well, I would assume?

Yes.

It is really getting people to pull the trigger on purchasing.

It is -- sure, price negotiations are tough.

But it is more getting them to move on buying and so the sales cycles are taking longer.

Pipeline is doing great.

The top of the funnel, if you will, is doing great.

It is getting people through the funnel that -- I think if you listen to some of the commentary from some of the biggest names in the business, they can offer very granular detail on that.

We have the benefit of being a recurring business, so we don't have to push the rock up the hill to the same extent, if you will.

Okay, thanks.

Finally if I could have one more in.

On your cost management and productivity and initiatives, would you say -- I mean I know it is ongoing and persistent.

Would you say the low hanging fruit is captured?

What ending are we in of those initiatives?

And if you could take us a level deeper there, thanks.

I would say it's a -- we are -- the inning reference is always a great one, right.

We would still see a lot of room here and (multiple speakers) .

This is a cricket game.

Yes.

I think a good way to think about it is we are moving to different phases of opportunities.

I noted procurement as kind of a next phase.

It is an area we have a level of coordination but we think we can do a lot better.

So we think there's a lot of fruit left to pick.

Great, thanks.

We try to hold to our one-hour limit.

So we're going to wrap up the Q&A now.

Thank you all for your time and attention this morning.

We very much appreciate you listening to us and your support.

Enjoy the rest of your summer.

Ladies and gentlemen this concludes today's Iron Mountain second quarter 2009 earnings call and webcast.

You may now disconnect.