鐵山公司 (IRM) 2009 Q3 法說會逐字稿

Good morning.

I will be your conference operator for today.

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

(Operator Instructions)

Mr.

Golden, you may begin.

Thank you.

And welcome everyone to the 2009 third quarter earnings conference call.

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

When Brian is complete, we will open up the phone for Q&A.

At this time I would like to welcome everyone who joined us for our annual Investor Day event earlier this month.

It's an event we certainly look forward to every year and we hope you found the presentations both interesting and informative.

We appreciate your support, and as a reminder, an archived version of the webcast and slide presentation are currently available on our website.

In an ongoing effort to enhance our communication, we recently under took an audit of the website.

As a result of the audit, we will be adding new content to the site.

The first items to be added are biographies for our board of directors which can be found in the corporate governance and information with respect to our debt portfolio in a supplemental data section of the site.

The debt information contained in this new posting is routinely disclosed in our earnings slide and periodic SEC filings.

However, we believe a central repository will prove useful to investors.

The information presented is as of the end of the quarter and will only be updated along with our non-GAAP measures on a quarterly basis.

Please watch for additional upgrades in the coming quarters.

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

Referring now to slide 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 or the current report on Form 8-K filed on May 8, 2009, for 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 others, are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

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

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

Thanks Steve and good morning everyone.

Because we're only three weeks from Investor Day, my comments today will be brief and I would like to start by re-emphasizing the key messages that we had on Investor Day.

The first thing that we have a very solid expanding foundation of business at Iron Mountain.

It is a resilient business that's diversified across geographies and product lines and it's a business that continues to deliver solid growth.

This is true across all three of our reporting segment, North American Physical, International Physical and Worldwide Digital, all of which are solid foundations and we're building future growth on these solid foundations.

The second key message that we were seeking to convey just a few weeks ago, is that we continue to manage well by applying both focus and discipline to our management cadence.

We are driving productivity improvements and getting the higher returns that come with those.

It is a function of focusing on operational excellence which distinguishes us both competitively and in our results.

This is a continuous improvement process and we continue to invest as a result of those improvements in both growth and returns.

We are in no way mortgaging this business to benefit current results.

This disciplined approach to serving, is serving us well in this environment and for the long-term.

The third key message that we wanted you to hear is that we are pursuing substantial growth opportunities.

We face a set of market dynamics that are fueled by trends which are big, long-term and inexorable.

It is about information growth, regulation growth, litigation growth and what we see as an ongoing tightening of IT budgets for the purposes of lights on.

The three major long-term growth opportunities we are pursuing are in our core physical business, our document management solutions business and in our digital business.

In the core physical business, it is about selling more.

This is a very large unvended $9 billion market opportunity.

We are seeking to target new customers by segmenting our base and penetrate and cross-sell our existing customers.

In document management solutions, the secondary of our focus, it is a very large market that is measured in the tens of billions.

Where we are really getting at the paper inefficiencies that exist in our customer systems and workflows.

We have unique competitive advantage here because we have the capabilities of both the physical handling and the digital handling of their documents and this crosses into both.

And we have line of sight to our customer's inefficiencies by dint of already being their custodian for their information assets.

And the third large market opportunities is in our digital business where we already have leadership in providing storage as a service.

And again, these are trend favored markets where we compete effectively today as a result the brand permission we have, the existing customer base we have, and the expertise specifically around compliance.

So, given these growth opportunities, we continue to invest towards our growth potential.

For example, when we isolate those growth opportunities, we see great opportunity to continue strengthening our ability of facing the market and going to market through our sales force, our marketing organization, and our customer service organizations.

And we will continue to strengthen that capability and invest.

Now, we do expect growth will moderate in the near-term as we said a few weeks ago.

The economic factors continue to apply pressure.

But we remain very optimistic about the long-term opportunities and we are pursuing that aggressively.

So, if you step back on the Investor Day messages, what we are really saying is that we have a great business and a great opportunity.

Our foundation remains solid, continues to expand, and our disciplined approach to management is driving strong performance.

We are well-positioned to capitalize on large market opportunities and we are investing accordingly.

So now let me shift gears and give you a brief overview of our Q3 performance.

In a few minutes, Brian is going to walk you through the financial details but first let me go through a few key themes.

First.

Q3 was a good quarter.

Our foundation remained solid and we continued to expand.

Storage internal growth was 7% consistent with prior quarters.

Now, as we move forward we do expect some moderation on storage growth given longer sales cycles and Storage internal growth was 7% consistent with prior quarters.

Now, as we move forward we do expect some moderation on storage growth given longer sales cycles and destructions are still higher than usual, again reflecting the current economic environment.

are still higher than usual, again reflecting the current economic environment.

The the impacts from the economy continue to also pressure service revenue growth rates.

We have lower activity rates and lower complimentary services.

This quarter we were also up against some tough comparisons, particularly with respect to fuel prices which peeked in Q3 2008 as well as paper prices.

But despite these economic pressures on our revenue growth, we continue to deliver strong sustainable profit performance.

Our focus on operational excellence drives OIBDA growth ahead of revenue growth.

OIBDA was up 10% in Q3 on a constant dollar basis.

We are very much on track for a strong full-year performance and we are raising our full-year OIBDA guidance.

Our execution is also driving strong cash flow performance and we are raising our full-year free cash flow outlook accordingly.

Now, in terms of our segment performance.

you will hear some consistent themes from me.

In North American Physical business, we are focused, as you know, on driving operational excellence with sustained storage growth and delivering strong profit performance to improving productivity as we go.

In our International Physical segment, we are building up the global foundation.

We had solid revenue performance in the quarter, good growth in Continental Europe and Asia, benefiting from growth investments that we've made in these regions.

We are making good progress against our strategic plans which are really supporting improved profit performance where we are pursuing North American like returns over time.

And Worldwide Digital is holding its own in a very difficult IT spending environment.

The business continues to face new revenue headwinds where there is pressure on areas such as license sales and our selling cycles remain longer than they had been prior to the recession.

Now, our recurring revenue base cushions the economic impact of these longer selling cycles.

And while it cushions the decline, it also moderates the recovery.

Our eDiscovery business continues to perform well and we are excited and confident about the strategic position of this business and we are committed to building the important growth platform going forward.

So, overall, Iron Mountain continues to perform and the team is managing well in a tough environment.

We remain on-track to deliver solid financial performance in 2009 and we remain excited about the long-term potential for the business.

With that, I will turn the call over to Brian for a more detailed review of our financial results and our outlook for rest of the year.

Brian?

Thanks, Bob.

Q3 was another solid quarter for Iron Mountain.

We continued to deliver strong year-on-year OIBDA growth despite economic impacts that are moderating the top-line gains.

Excluding revenue impacts, revenues grew 2% and OIBDA grew 10% reflecting benefits from our continued focus on discipline execution across the business.

Overall, we are positive about our business performance and outlook and remain on-track towards delivering strong full-year financial 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've made to some of its components including an increase to our OIBDA and cash flow outlook.

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

As noted, Iron Mountain delivered continued strong OIBDA growth in Q3 despite difficult comparisons to Q3 2008 and economic pressures that constrain the top-line gains.

Storage internal revenue growth remains solid at 7% supported by international expansion market growth and continued performance from North America.

These gains offset weakness in service revenue due to lower core activity levels and declines in complimentary service revenues.

Service growth was also impacted by tough comparisons to high prior year levels for fuel surcharges and recycle paper pricing.

Despite these impacts, we continue to deliver strong OIBDA performance at the high-end of our forecasted range benefiting from improved storage gross margins and productivity gains.

For the quarter we delivered OIBDA growth of 6% on a reported basis and 10% excluding the impacts of foreign currency rate changes.

As a reminder, 2% of this growth is due to the initial recharacterization of vehicle leases that we've discussed in prior conference calls.

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

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

Overall, we remain o- track for strong full-year financial performance.

In terms of our outlook for the balance of 2009, we are refining our full-year revenue guidance to reflect year-to-date results and raising our OIBDA and free cash flow guidance range to reflect our strong continued operating performance.

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

Let's move on to looking at the 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 2% as storage gains were off-set by pressures on service revenues.

Storage revenues which represent more than 55% of total revenues continue to provide an expanding foundation for overall revenue performance.

Storage internal growth for the quarter was 7% supported by consistent performance in North America and strong growth in International expansion markets particularly Continental Europe.

As shared at Investor Day, we do expect some moderation in storage revenue growth in upcoming quarters reflecting impacts from longer sales cycles and continued higher destruction activity.

Of course service internal growth was 1%.

Gains were constrained by pressure on transportation and shredding service activity levels and significantly reduced fuel surcharges in Q3 of 2009.

Excluding the impacts Excluding the impacts of the decreased fuel surcharge, core service internal growth was 4% in Q3.

Core service revenue continue to be impacted by economic conditions and was is a key factor in our moderated outlook for internal growth.

Complimentary service revenue internal growth was minus 15% for the quarter, within our forecasted range.

Results reflect a $9 million year-on-year decline on recycled paper revenue and other impacts from economic factors which drove pressure on special projects, fulfillment revenues, and software license sales.

Foreign exchange reduce reported revenue growth by 4% in the quarter.

Although trends on this front are improving and we should see moderately positive effects at current exchange rates as we move forward.

Based on our year-to-date results and current trends, we are refining our full-year revenue outlook.

We expect full-year internal growth to be about 3% at the low end of our previous 3% to 5% growth range.

This change primarily reflects continued expected softness in service revenue given current economic conditions.

Offsetting this impact, we now expect foreign exchange to have a 4% to 5% negative impact this year.

So our expectation for reported revenue growth is in a similar range, down slightly for the year.

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

Slide six compares results for this quarter to Q3 of 2008.

Overall improved storage gross margins and productivity gains supported strong bottom line performance.

Our largest segment, North American Physical posted 1% total internal revenue growth.

Solid storage, internal revenue gains were offset by the decline in fuel surcharges, recycled paper prices and lower service activity levels.

The weakening of the Canadian dollar over the last year further reduced reported revenue growth in the segment.

Our International Physical business achieved 5% total internal growth, supported by strong storage revenue gains particularly in Continental Europe.

The total internal growth rate was moderated by decreased complimentary service revenues including impacts from the completion of a large European project in 2008.

Reported growth was reduced by more than 15 percentage points due to the strengthening of the US dollar compared to Q3 of 2008.

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

Finally, our digital segment posted minus 1% internal growth.

Our overall digital revenue gains continue to be constrained by pressure on new subscription sales and software license sales in the current environment.

We expect the impact from softer subscription sales will constrain digital recurring revenue growth heading into 2010.

Sustainable productivity gains particularly in our North American physical business helped drive strong year-on-year improvement up 290 basis points in our gross margin.

Higher storage gross margin in North America, aided by improved pricing, was a key factor supporting gross margin gains.

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

SG&A growth was 4% in the quarter compared to prior year levels excluding the impact of FX changes.

This modest growth reflects targeted initiative spending and the selective impacts from certain expense accruals.

OIBDA was $224 million for the quarter, up 6% including 2% of growth from the initial recharacterization of certain vehicle leases.

OIBDA growth was reduced by 4% due to the year-over-year strengthening of the US dollar in Q3, 2009, compared to Q3, 2008.

Depreciation was $72 million and amortization was $9 million in-line with expectations reflecting continued capital spending controls.

Depreciation grew $7 million versus prior year levels in Q3 primarily reflecting the additional depreciation associated with the recharacterization of the vehicle leases.

Operating income was $143 million for Q3 of 2009, up 5% versus the prior year.

Excluding the asset gains and losses, operating income grew 4%.

Moving on with our review of Q3 P&L performance.

Slide seven bridges our Q3 operating income to net income to net income and APS results.

Operating income for the quarter was up 5% to $143 million on a reported basis.

Our Q3 interest expense was flat compared to Q3 of 2008.

We continued to achieve interest savings driven by lower debt levels and reduced interest rates.

These gains were offset in Q3 by additional interest expense related to our recent offering as we carried both the 8.625% bonds and the new 8.375% bonds for about a month during the call process to retire the 8.625% bonds in September.

Other expense for the quarter was $1 million compared to $16 million in Q3 of 2008.

Included in other expense this quarter was a $3 million early debt extinguishment charge related to the retirement of the 8.625% notes which were partially offset by modest FX gains.

As a result, we reported net income attributable to Iron Mountain for the quarter of $43 million or $0.21 of diluted share.

Impacting that income this quarter was an effective tax rate of 47%.

While changes in foreign exchange currency rates within the quarter had minimal minimal effects, other discreet tax items added a net $6 million to our Q3 2009 book tax provision and reduced earnings by about $0.03 per diluted share.

These discreet items include true-ups based on our filing of our US federal, state and certain foreign tax returns and related foreign tax credits and interest on our tax reserves.

In Q3, the impact of our foreign exchange rate changes increased our effective tax rate by one point.

Other discreet tax items such as I have just described increased our effective tax rate by an additional 10% in the quarter.

For the quarter, our tax rate before the impact of foreign currency rate changes and other discreet items was 36%.

This was slightly lower than forecasted in order to bring our year-to-date tax rate before impact of foreign currency rate changes and other discreet items to 39%.

We are currently forecasting our tax 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 the year-to-date results.

Turning to slide eight, you can see that our Q3 rules continue to seed the trends we have seen throughout 2009.

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

Internal revenue growth is currently at 3% for the year-to-date, supported by storage revenue internal growth of 7%, which is offsetting pressures and certain activity base core revenues and complimentary service revenues.

We continue to leverage 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 has resulted in 320 basis points improvement in our year-to-date OIBDA margin.

Net income for the first nine months of 2009 was $160 million compared to $81 million for the same period in 2008.

2009 year-to-date EPS is $0.78 per diluted share.

The key factors driving improvement in net income and EPS results are higher operating income in the impact of foreign currency changes on other income expense and on our effective tax rate.

For the first nine months of 2009, FX changes resulted in $24 of other income and associated tax benefits.

These gains have been partially offset by $8 million of additional tax expense related to other discreet tax items.

Combined, these factors have added about $0.08 to our year-to-date EPS results.

In 2008, the impact of foreign currency rate changes on other expense and effective tax rates resulted in a $0.16 reduction in diluted EPS for Q3 year-to-date.

Adjusting both years EPS results to exclude these factors, comparable EPS has increased 26% year-to-date.

We will 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.

For the first nine months of 2009, we incurred $198 million of CapEx including $19 for real estate.

Consistent with prior years we have a heavier level of capital spending scheduled later in the year.

Based on our most recent outlook for 2009 execution, we are lowering our capital expenditure guidance to $360 million.

We expect to spend about $10 million less than previously forecasted for real estate and we expect some additional efficiencies from projected timing of project spending.

Note that these changes should not impact our 2010 preliminary outlook for capital spending in the range of $380 million.

We remain on-track for record capital efficiencies in 2009 and look to build on that progress that next year while supporting key growth initiatives and projects that help drive long-term return improvement.

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

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

For the first nine months of 2009, free cash flow before acquisitions and discretionary investments in real estate was $233 million.

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

Based on our strong year-to-date operating performance, we now expect free cash flow before acquisitions in discretionary investments in real estate for the year to be approximately $240 million to $270 million.

This will result in a strong improvement over record 2008 levels reflecting continued benefits from our reference 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.

As a reminder in Q3, we issued $550 million of 8.375% notes due 2021 at a price of 99.625% and used the net proceeds to retire our 8.625% note due 2013 and pay down our revolver.

As a result, our debt portfolio at the end of third quarter was in a very strong position.

Our weighted average interest rate is 6.9% and we are 83% fixed.

Maturity is now at 8.4 years with no meaningful repayment obligations until 2014.

Consolidated leverage at the end of Q3 is now 3.4 times at the low end of our new target range of 3.5 to 4.5 times OIBDA and substantially below our [5.4] times our bank coveted limit.

As we discussed in the past, our business will naturally deliver in the absence of meaningful acquisition spending.

Benefits from our strong operating cash flows and limited acquisition activity over the last two year has produced significant improvements in leverage ratios and liquidity.

We currently have $449 million in cash and $620 million in additional borrowing capacity.

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

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

This concludes the review of Q3 2009 results.

In summary, we are positive about our results, we continue to make progress in strengthening our business foundation globally, while delivering strong financial performance.

Let's now turn to turn to slide twelve to review our updated financial guidance for Q4 in the full-year of 2009.

Slide 12 summarizes our full-year 2009 and Q4 outlook.

As noted, we refined full-year revenue range to $3 billion to $3.02 billion to reflect year-to-date results.

With respect to OIBDA, we are raising our guidance range to $850 million to $865 million reflecting our continued strong operating performance.

This range implies 12% to 14% constant currency growth for the year.

As a reminder, included in OIBDA for 2008 is about $20 million of reduced rental expense related to the initial recharacterization of our vehicle operating leases to capital leases.

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

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

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

As noted, we are lowering our capital expenditure forecast to $360 million for the year including about $45 million for real estate.

For the 4th quarter, we are projecting revenues of $766 million and $786 million and OIBDA of $212 to $227 million.

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 is in the range of $850 million to $865 million.

Our outlook for D&A remains at about $320 million and interest expense is up slightly from last quarter due to the impacts from our Q3 refinancing activities.

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

Likewise, with respect to our tax provision, we've assumed at 39% structural rate plus the actual impact of discreet items recorded in the first nine months of 2009.

These expectations yield EPS in the range of $0.99 to $1.03 per diluted share assuming 204 million shares outstanding.

Combined, these factors increase net income attributable to Iron Mountain by $16 million or $0.08 per diluted share.

Adjusting EPS for 2009 and 2008 to exclude these factors, this outlook implies comparable EPS growth of 18% to 23%.

That concludes my opening remarks.

We will now open the line for Q&A.

[Begin Q-And-A]

(Operator Instructions) Your first question comes from the line of Andrew Steinerman.

Hi there.

I'd like to start out, Brian, with just a big picture question about free cash flow and growth here.

Obviously this is a quite a year for free cash flow and by (inaudible) made your CapEx comments.

But it also is a year where growth has decelerate.

My question is as you look further out, growth reaccelerates into next year and beyond.

Do you feel like that will be a drag on cash flo?

No Andrew.

I think we are confident in our outlook and obviously on Investor Day we shared a multi-year view on this.

That view incorporated the expectations for 2010 with some of the modern improvement we are expecting on the growth front and obviously improvement in growth as we work through the economic challenges that we are seeing currently.

And even with that improvement we are targeting continued capital efficiencies and continued improvement in our cash flow.

We think that we have got that reasonably figured into our long-term outlook.

As we often discussed, there are number of factors that will aid our cash flow growth as we move forward in addition to the discipline that we have been applying.

We do expect to drive more growth from less capital intensive services.

Areas like pricing are contributing more of a revenue growth over time as they have in the past.

That's a positive factor.

(inaudible) business.

And so - - all those, this is not a short-term benefit from some change in volume.

This is primarily driven by just increased discipline and focus and a real strategic emphasis on this as a key part of our financial strategy.

Right.

My second question is about the preliminary 2010 outlook which had a lot of different components given at Analyst Day including 3% to 6% internal growth for 2010.

I want to make sure that you remain comfortable with the preliminary outlook that you gave for 2010 realizing it is still a little bit of a distance away.

Yes, we are not going to update anything formally today, but obviously it was just a few weeks ago and we are comfortable that that is a good range.

Okay.

Thank you.

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

Good morning.

Good morning.

Wondering if you could just talk a little bit about the complimentary services business.

The growth rates there have been bouncing around a little bit.

It was down roughly 15% and then down 6% and then on down roughly 15% again.

I guess, are things actually decelerating there sequentially?

I think the comp was actually easier especially since I think scrap paper pricing are actually increasing sequentially.

I just want to get a little more of a flavor as to what is going on in that business.

So, in terms of color, Andrea, the thing to know is that this is a lumpier business for us.

This is a more variable business for us than our core storage business.

Services on top of it.

Projects get delayed quarter-to-quarter.

We do see the pipeline improving.

I feel very confident in our ability to grow that business as economic conditions stabilize.

But it is lumpy from quarter-to-quarter.

Andrea, we have seen year-to-date performance and complimentary revenues in line with our forecasts.

In the second quarter, we did have a benefit from a big license sale reinforcing the point that Bob is making is that you do see quarter-to-quarter swings on this.

It has been consistent with what we had expected and we do expect continued pressures on the more discretionary revenue front until we see clear signs of improvement in the economy.

Great.

And then question on the overall internal revenue guidance coming in at the lower end.

Is there anything that actually came in incrementally worse than you had been expecting or is it just a matter of where we are at the low end of the range because things just hadn't accelerate or improved as fast as you would have thought?

We have seen a continued pressure on the service activity lulls.

So, nd we obviously, our year-to-date growth is 3%.

We have seen the last couple quarters a continued pressure - - we noted transportation activity, shredding activity.

It is general economic just how much folks are pulling the records back and forth from the record centers as well as - - it is interesting, we'll - -

It's also the reflexes of the customers.

Historically, when it's same day delivery they are now okay with - -

Premium services are - - people are focused on that, trying to manage that more tightly.

So, that is the key factor.

I think the other elements we are consistent with what we have been highlighting.

Thank you, that's very helpful.

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

Great, thank you.

Hey, Bob.

Hey, Brian.

Good morning.

How are you doing.

Good.

Thanks.

Quick question.

Obviously the storage growth picked up nicely sequentially, the storage, from six to seven and I know it seems like there are still some challenges there from a macro perspective.

Can you help us frame out the range you are thinking about in that business.

I think that obviously we are dealing with trends that we have seen in the last few quarters related to delays in sales cycles and higher destruction levels which historically for the Company, that has - - you see that periodically.

But I think the economic conditions continue to push companies to take big steps to say how might I save money and that is pushing them to consider the destruction programs.

We know that those factors as they flow over and start getting incorporated in the underlying growth, they are going to moderate our growth rate.

I think it is a reasonable expectation to see storage growth in the mid-single digit range in the next few quarters.

It is still solid.

It's still positive.

It is not going to be at the higher rates that we saw at the end of last year driven by these economic factors.

I pointed out, Kevin, at Investor Day and just one comment and I just want to emphasize here is that we help customer with this.

We go to them proactively.

They are looking to have lower total program costs.

We obviously are not interested in lower prices.

But we are able to help them lower their cost by getting after what they can destroy.

And we are in many cases self-inducing this.

It helps our customers lower their program costs and inherent without lowering our prices.

And it is useful for them in this time frame.

That's part of what we are doing is working with them.

Can you just - - obviously there is a benefit from the destruction where that is reflected across the three components.

Would that be more in the storage itself or in other parts of the business?

It will come in the core service revenues.

And so that that is actually mitigating some of the activity pressures we are seeing.

One other question and I will get back in the queue.

We are at a 29.3% EBITDA margin and really what is close to a trough of the cycle.

That's at the trough.

Are there any thoughts in targeted OIBDA margins as we think about the business going forward?

Kevin, that is just not how we manage the business.

It is not how we think about it internally and we resist talking about it externally as well.

I think we obviously, provide outlook on what we think our OIBDA growth can be over time relative to our - - and our revenue growth and implies continued moderate margin gains over time.

I think to Bob's point, we are going to look to maximizing our business potential.

We do like having that discipline across each of our business segments to say we want you to grow profits fast as revenues as a discipline.

And we like to deliver that as a Company.

We don't have an absolute margin target.

Right.

Because you would do things like moderate how you would pursue [DMS] deals the deals because it would take down OIBDA in a given quarter.

It doesn't make sense if it's a good economic opportunity.

Kevin, obviously our preliminary guidance for 2010 would imply that we are going to keep on this path and make continued strides.

Yes, that's helpful, thanks.

Thank you.

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

Hi.

Thanks a lot.

With the state of the economy being such a hot debate especially the past week.

Anything you gleaned from the month of October since the Investor Day on whether things are improving.

Anything interesting that has come up with customer conversations recently?

Vance, we - - you see bright spots in certain parts but there is still just a general tone of cost cutting as people are preparing 2010 budgets.

They are trying to figure out how they can save money.

So, there are still amongst our customers and where can we save.

At the same time, we seeing a big pick up in the pipeline.

A lot of the things that get deferred right throughout this year are starting to build.

And people can't put off investments in IT infrastructure forever.

They can't.

They - - and so, it is a mix.

There still a tremendous just under tone of just wanting to save money but our pipeline is improving in part because it is backing up.

Well, what we see internally is a lot of interest and more dialogue with customers for bigger ways for us to help them manage records which plays very well to things like our DMS (inaudible) strategy.

But I think at the same time I think, Bob mentioned, there are more people involved with saying no.

And more people - - and more of a tendency to delay these decisions.

We are hopeful but we haven't seen the improvement.

The good news is our value proposition leads with saving money.

I was at a customer last week where we can save them a lot money through last year but they still have to - - there is just more people involved in that decision than there would have been even a year ago.

That is helpful.

Just regarding a couple of external factors.

Could you provide a little color on how recycled paper prices are tracking most recently since that can change quickly.

And similarly, any thoughts on how fuel prices are impacting the business this far into the quarter?

No.

First on recycled paper.

We have seen improvement on that front.

And the market is now on the $150 to $160 range and we met a few weeks ago and at I day it was close to the $130 range.

And that's obviously picked up.

There is demands improved in Asia.

It's interesting, there is a supply and demand dynamic going on where there is less recycled paper being generated and reasonable demand from Asia.

So you have a bit of an imbalance there that is helping to support higher prices in the near-term.

So that's a positive factor.

I think it is important it keep potential benefits like that in context for our business.

Recycled paper is about 2% of our revenue.

While the market pricing may be up, we are planning for continued pressure for service and activity levels so that will offset some of those gains.

On balance, it as positive factor but I just wanted to make clear that it is likely to be moderated by other impacts.

Keep in mind, Vance, that as the price of paper goes up with the smallest competitors and local markets, the price of surface goes down.

So, there is a yin and yang here.

Yes.

On your second question.

The energy costs really haven't been a major impact on our business.

And we have seen some efficiencies on the transportation side.

They continue to trend in the 3% range for our business.

e had some decreases in fuel surcharges which offset some gains in the efficiencies.

On that, it hasn't been a major driver of our margins, but relatively more favorable.

If that continues that will help us a bit.

Okay.

Great.

One last one for you.

With the consolidated leverage of 3.5 to 4.5, presumably you would like to be in that range over the long-term.

Any thoughts of how you will get there or how soon you want to move to that range or for the time being are you happy to remain below the targeted range?

We are committed to leverage as a part of our capital structure and approach.

At the same time, we are okay with being relatively more conservative in the near-term.

We are okay with tempering moves out the range.

And think it is something that will continue to monitor.

And we are okay with being a bit low in the current environment and over time we obviously acquisitions are something that - - we are interested in strategically.

And if we don't have opportunities on the front, we will look at other vehicles to make sure we have an appropriate capital structure.

Very helpful.

Thanks.

Next question comes from the line of David Gold with Sidoti.

Good morning.

Just really a quick one.

Looking at storage you know, picking up sequentially.

And you pointed to mid-single digit growth from her on out over the next few quarters.

Can you give - - I know you pointed to a couple of factors.

Are you seeing - - what are you guys basically looking at that isn't showing just yet in the numbers?

Well, you know, one thing to highlight, David, is obviously we round our numbers and this was a soft seven, if you will.

And it is not that all that different in terms of the trends.

We have highlighted the key factors.

It is the pull through effect of some of the delayed sales and the higher destructions.

It takes a little time for that to flow through.

We did see continued higher destructions for the quarter.

And I also highlighted, it is a smaller part of the equation.

The digital business, the slow down in subscription sales.

That typically for us has been a real positive factor against strengthening the growth rate because that's a high growth area.

And when you don't have that growing at the same kind of rates, doesn't give you the upside benefits.

Those are all the factors.

I don't want to cause undo concern.

We are talking about some moderation but still solid growth and not a significant change from where we have been trending.

Okay.

Perfect.

That's helpful, thanks.

Your next question comes from the line of Ashwin Shirvaikar from Citigroup.

Hi, this is Phil [Steward] for Ashwin.

I wanted to ask about the International internal growth that seems to held up better than North America and go into some the differences there.

Fundamentally, the major markets that we are operating in there.

The UK, Continental Europe, we are investing in the business and hopefully, if you look back over the last few quarters, we see continued improvement out the International segment.

And if they really have turned a corner in their performance and we expect them to pursue North American-like returns over times.

We should feel real good about that business and the way the teams are improving performance.

We try to highlight the progress and the expansion market and so Continental Europe and Latin America as well.

We are key contributors to the improvement we are seeing on the growth side.

And they are similar factors impacting international markets like the UK that the trend we are seeing are similar to the UK.

As Bob said, on balance, we have got the growth from expansion markets and doing in a good place where we think we can drive good profit performance as well moving forward.

They are doing a good job.

Just one last clarification.

On the preliminary 2010 guidance.

Given the raised OIBDA range for 2009.

Is 6% to 11% growth still achievable or should we look at the absolute range that you provided?

Our intent is to - - we look at it from a growth rate point of view.

We are not updating formally today, but our intent would be to grow in a similar range off of the forecast this year.

Thanks.

Your next question comes from the line of Scott Schneeberger of Oppenheimer Funds.

Thanks, good morning.

Going back to the question on storage and you mentioned, it is going to be mid- single digits.

I know I am asking you to predict the future here.

But do you see that persisting?

It sounds like through this quarter and into the beginning of next year.

How far - - how much visibility do you have into how that is going to trend?

And then the second part of that question is, is that predominantly commentary associated with North America and the types of trend you are seeing?

Are they consistent globally with North America or is there any divergence between the two in core storage?

North American and the UK perform in the similar fashion.

And outside of that, there isn't a lot of similarity.

You know, essentially the way we are investing in the extension markets that Brian just mentioned.

We do have visibility into the next few quarters.

It does - - because it is predictable with an understanding.

We have seen consistent trends in things like incoming volume on storage.

And now, we obviously know what the flow-through effect of things like new sales will be.

I would say the trend can change and it doesn't change quickly.

So I think our visibility is more over the next few quarters and that's all we are trying to highlight.

There is going to be some moderation.

And it is entirely consistent with the guidance that we provided at I Day.

That's why we are in the 3% to 6% range in part, the factors we are highlighting and the growth rate into next year.

Thanks.

Could you guys address a little bit on the verticals you serve health care, legals, et cetera?

Just any trends you are seeing between those and financial services obviously?

Any pick up in financial services for instance?

Just of late trends that you might be noting.

Our largest customers in financial services were actually highly engaged in helping them reduce their capital expense in favor of paying us as they go.

So I feel very good about the biggest customers in the segment.

There really is no discernible change when you get outside of the top 20.

But we feel good about the it in the top accounts in that space.

Healthcare as you know, there is an awful lots of activity about how vendors can work together to essentially get at this acute problem and the amount of money that is going to it.

I would say that it hasn't - - You know, the pipeline doesn't for knee act as a predict tore of the results.

There is an awful lot of interest in the proposals and that sort of thing.

We are seeing traction in our medical image archive business.

But it as small business still and we are building it as a fly wheel.

But we continue to sign a lot of contracts there.

Lot of activity in healthcare.

And doesn't necessarily come through the pipeline as readily as it would in financial services.

And you know, I actually feel pretty good about the way the biggest customers are behaving in financial services.

Thanks very much.

Sure.

(Operator Instructions) Your next question comes from the line of Franco Turinelli with William Blair & Company.

Two questions for you, if I may.

Wanted to start with the worldwide digital side of the business.

And maybe just help me understand a little bit or remind me just a little bit of how that is composed.

Because that, I would think, is an area where your storage business would be growing pretty fast just do due to the proliferation of digital records but obviously other things going on in there including software and other stuff that is limiting the internal growth.

Can you drill down into worldwide Digital a little bit more for me?

Sure.

Worldwide Digital is comprised of really - - we are the back up in data protection segment which constitutes the live vault and connected acquisitions.

We have an archival business and we have a eDiscovery business.

The storage comes off of the first two.

And new sales are very tough in that environment right now .

We can see that in our growth rate.

The sales cycles are longer.

IT purchases are deferred.

I spend a lot of time with CIOs and I can see see how peer companies and how they really are delaying and deferring IT investments.

A quick anecdotal survey would be to check with any CIO right now to see what their growth is year-on-year and it is down in absolute terms.

An easy place to defer is on incremental storage and we are seeing the net effect of that in our revenue cycles.

I mean, it is really a function of new

So, even though there is a component of that revenue that is related to volume of storage, you are saying that people are constraining the growth of that storage volume even if more records are out there.

Is that the way to understand.

Yes, Franco, it is happening both on a subscription basis and a license basis.

If you look at the results of the pure storage providers into the market, they are actually going backwards in absolute terms.

Right.

The easiest proxy for this is to look at the results of the big storage providers because our biggest competition in this business is people doing it for themselves by buying storage.

And you can see they are buying less and less of it.

We are seeing the effect of that.

And it is not as dramatic with us because of the recurring revenue base and the recovery won't be as traumatic either.

The other question that I have for you and and this is a big picture question.

I am interested at this - - by the decoupling, in a sense, between core services growth and storage growth.

As you know, I have covered the Company for over a decade.

Generally we have seen fairly good correlation between core services for storage with core services actually averaging slightly higher than storage.

And you partially answered the question by talking about transportation, treading, the impact of fuel surcharges and stuff.

I am curious if you think that there is something more fundamental going on here or if this this is a temporary thing.

And if it is a temporary thing, is it just a deferral or is there something more fundamental than a deferral.

Let me tell you how I think about it, Franco.

The strategy, if you back way out, is to get storage and drive services on top of that storage.

But one of our fundamental value propositions is to help customers get rid of information.

When we go in, our value proposition is to actually lower your cost associated with this stuff.

Most companies save much more than they need to save and that we end up with more storage as a result.

But it is really getting at their inefficiencies and our goal is to keep adding more services on top of storage.

That's our fundamental value proposition.

But it is all driven to reduce cost and in many cases, that means lowering their cost of storage without lowering our price.

But I guess, where I am not sure that I understand the impact of that is is whether or not, and again, with not a quarterly outlook, but with a multi-year outlook.

Should we think of services returning to being in-line with or above storage growth?

Or are we now in a phase of the business where services will actually remain below storage growth?

Are you referring to core services?

Yes, I am.

I'm sorry.

I was imprecise.

I was referring to core services only.

I apologize.

We do think over time our core services growth should be at or above our storage growth.

That's our intent, obviously.

We are shredding, errors like shredding, Franco, are a bigger part of the business that is a key growth area.

And the factors that are pressuring in the short-term, if you really look at it, is activity levels.

People are swapping out premium activity for standard activity.

There is 10% unemployment.

And there are records that are sustaining in our facilities and natural volume for businesses but there is less business activity going with those records in the short-term.

It is clearly, from our point of view, an economic impact.

And we think the long-term - - our strategy of long-term should support our services growth.

Especially with the economy.

This is clearly unusual.

We didn't anticipate.

And the changes have happened quickly.

And it is something that we didn't anticipate which is why we have a lower growth outlook than we did when we came into the year.

We don't see this as secular or strategic change in the business.

Thank you Brian.

Thank you Bob.

You're welcome.

I think that concludes the call today.

Thanks very much, again for attending Investor Day a few weeks ago.

We very much appreciate your support and your time today on the phone.

Enjoy the rest of your day.

This concludes today's conference call.

You may now disconnect.