鐵山公司 (IRM) 2010 Q1 法說會逐字稿

Good morning me name is Bonnie and I'll be your conference operator today.

At this time I will like to welcome everyone to the Iron Mountain Incorporated first quarter 2010 earnings call webcast.

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

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

(Operator Instructions).

Thank you.

I would now like to turn the call over to Mr.

Stephen Golden, Vice President of Investor Relations.

Please go ahead, sir.

Thank you and welcome everyone to our 2010 first quarter earnings conference call.

After my announcements this morning, Brian McKeon will review our financial results followed by Bob Brennan, CEO remarks.

When Bob is finish with his comments we'll open the phones for Q and A.

Per our custom we have a user controlled slide presentation on the investor relations page out 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 2010 financial performance.

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

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

As a reminder, on our last earnings call we introduced two new metrics, adjusted OIBDA and adjusted EPS as part of our ongoing effort to enhance our investor communications.

We use serve non-GAAP measure when presenting our results.

Adjusted OIBDA and adjusted EPS and free cash flow before acquisitions and investments, among others, are metric we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

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

With that, I would like to introduce our CFO, Brian McKeon.

Thank Stephen.

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

We posted solid results in the first quarter of 2010.

Revenue growth of 7% was in line with expectations.

Storage internal growth was solid at 4%.

Service internal growth was 5% and strength and complimentary service revenues including benefits from higher paper prices offset continued softness in core senses.

As we were work to strengthen our revenue growth, we continue to drive strong profit and free cash flow performance.

For the quarter, we delivered adjusted OIBDA growth of 11%, driven by gross margin expansion of nearly 200 basis points.

This expansion continued, continues to be supported by productivity and pricing gains.

Profit gains and capital efficiency drove year-to-date free cash flow of $54 million.

Adjusted EPS for the quarter was $0.23 per share, an increase of 19% compared to the same period last year.

Our reported EPS was $0.12 per sure including the impact of higher effective tax rate and the change in fiscal year end for Iron Mountain Incorporated Europe from October 31st to December 31st.

I'll discuss these item more fully later in my remarks.

Overall, Q1 was a solid start to the year and we're on track toward delivering strong full year financial performance, consistent with the goals shared on our Q4 earnings call.

We are refining our guidance today to include the expected impact of the recent earth investigates or Chilean business, including items such as insurance deductibles and remediation costs.

Let's now turn to slide four and begin our review of the first quarter results.

Slide four compares our results to this quarter for the first quarter of 2009.

As I mentioned revenues for the quarter were up 7% to $777 million.

From you a segment perspective, North American physical posted 4% internal growth, supported by 4% storage internal growth, and strong complementary service revenue performance.

Overall gains were constrained by continued pressures on core service activity levels, including impacts from unusually severe winter weather in several major markets.

Our international physical segment reported 6% internal general supported by solid 8% growth in core revenues.

These gains were moderated by we client in complementary revenues due primarily to lower project activity.

In our digital segment reported revenue growth was 3% for the first quarter, including benefits from the [Mimosa] acquisition we completed at the end of the February.

Internal growth for the segment was minus 1% as e-discovery gains was offset by impacts from lower subscription sales in recent quarters.

Sustainable benefits from productivity initiatives and pricing gains, particularly in our North American physical segment, drove higher gross service margins supporting a 190-basis point improvement in our consolidated gross margin.

Our higher storage gross margin aided by improved pricing in North American physical and gains in our international physical business, were also key contributory growth to gross margin improvement.

Adjusted OIBDA grew 11% driven by strong gross profit gains.

Below the adjusted OIBDA line, depreciation was $76 million and amortization was $9 million, in line with our forecast.

Other expense for the quarter was $9 million, including $5 million of charges related to foreign currency rate changes and a $4 million one time charge related to the change of Iron Mountain Europe's fiscal year from October 31st to December 31st.

The charge represents the net impact of this change for two years ended December 31st, 2009.

There were no other effects of this change in our P&L.

Adjusted EPS for the quarter was $0.23 per share, an increase of 19%, compared to the prior year, reflecting strong operating performance, and flat year on year interest expense.

Reporting EPS for the first quarter was $0.12 per share.

Through the reported earnings were impacted by a higher effective tax rate reflecting the impact of discrete items, which more than offset higher pre-tax income.

The structural tax rate for the first quarter was 39%, as the impact of expired tax legislation was less than originally expected.

The impact of discrete tax item primarily related to foreign currency rate changes in the quarter added 23 points to the effective tax rate.

We expect the structural tax rate for 2010 to be 39%.

Let's now take a closer look at revenue growth on slide five.

Slide five breaks down our overall revenue growth, it shows internal growth on service line as well as the impact of acquisition of and foreign exchange.

As noted, our total internal growth for the quarter was 4%.

Storage internal growth was solid at 4%, while complementary service revenues rebounded from a difficult 2009, to post 17% internal growth in Q1.

These gains were offset by continued pressures on core serve activity levels.

Storage revenues, which represent more than 56% of total revenues, continue to provide an expanding foundation for overall revenue performance.

Storage revenue internal growth was 4%, with gains moderated by economic effects, which have constrained storage volume growth in recent quarters.

Core service internal growth was flat for the first quarter.

Growth rates were limited by lower activity levels, which remain pressured by economic conditions.

We're planning for continued softness in core service activity, given recent trends as well as the select impacts from service reductions related to the Chilean earthquakes.

Overall service revenues grew 5%.

Reflecting strong growth in complementary service revenue, supported by recent gains in recycle paper pricing.

While paper price levels remain well above 2009 levels, they recently retreated by 15% from February and March, levels which will lessen future gains.

Foreign exchange increase reported revenue growth by 3% in the quarter reflecting the year over year weakening of the US dollar.

At current exchange rates, positive effect from foreign currency will moderate as we move forward.

The Mimosa acquisition had minimal impact on our revenue growth in Q1 due to the timing of the close.

Looking ahead, Mimosa should adjust under 1% to our reported revenue growth each quarter.

Let's turn now to slide six to review our performance or a segment basis.

Slide six shows key metrics for each of our four segments compared to Q1 of 2009.

As a reminder, we have distinct goals and roles for our business segments within our integrated strategy.

The North American business segment is the key financial driver of the business.

We are capitalizing on our core opportunities to expand this high return foundation.

In the international physical segment, we're expanding our capabilities globally through a balanced approach focused on driving strong growth and improved returns.

In our digital segment, we're investing to drive accelerated growth and attracting incremental markets.

As shown in this slides, our physical businesses continue to deliver strong operating performance.

North America, our largest segment, continues to drive strong profits and cash flow.

We're advancing our optimization agenda, while expanding our business foundation through a targeted growth strategy.

We have several programs aimed at driving improved revenue growth and our field leadership is focused on support this segment with the same rigor they use to drive operational excellence.

Our international is performing well with solid revenue growth and improved profitability.

We're beginning to leverage the success we had with operational excellence in North America in our larger more developed international markets.

Changes in the year on year exchange rates increased our reported results in this segment by approximately 8%.

Please note that Cap.

Ex., which was 14% of segment revenues in Q1, includes about $11 million incurred by Iron Mountain Incorporated Europe in November and December, 2009.

In our digital segment, we're working through some of the effects of softer subscription revenues in recent quarters on growth while investing to advantage our long-term strategic agenda.

The integration of Mimosa is progress willing well and will enhance our service offering in support of accelerated digital growth.

Let's turn to slide seven for a more detailed look at our capital spending and free cash flow.

Slide seven summarizes our capital spending a free cash flow on year-to-date basis.

Total capital spending was $57 million for Q1 including $3 million for real estate.

As I just mentioned, included in the total is $11 million of Cap.

Ex.

that was incurred by Iron Mountain Incorporated Europe during November and December 2009.

Traditionally, the first quarter is light Cap.

Ex.

quarter as some of our projects scheduled for later in the year an many require time to plan and source before the significant expenditures are eventually made.

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.

For Q1, free cash flow before acquisitions and discretionary investments in real estate was $54 million.

The year on year decrease in free cash flow was a result of higher capital spending in 2009, compared to 2010.

This is due primarily to a large accrued balance at December 31st, 2009, and the inclusion was additional two months of Cap.

Ex.

from Europe.

For 2010, we expect free cash flow before acquisitions and discretionary investments in real estate to be approximately $340 million to $370 million reflecting continued benefits from our efforts to improve profitability and capital efficiency.

As we announced in our Q4 earnings call in February, Our Board approved a $150 million share re-purchase program.

In the first quarter, we acquired 410,000 shares for approximately $11 million.

This leaves us a balance of $139 million for additional share re-purchases under the existing plan.

Let's now turn to slide eight for review of key debt statistics.

Our strong performance supports the continued strengthening of our balance sheet.

Our debt portfolio of March 31st, 2010, remained in a very strong position.

Our weighted average interest rate of 6.9% and we're 87% fixed.

Maturity is just under eight years with no meaningful repayment obligations until 2014.

Consolidated leverage remained at 3.3 times, benefitting from strong rating cash flows while reflecting the $112 million we based for the acquisition of Mimosa.

Our liquidity position remains strong at more than $1 billion with $325 million in cash and $743 million in additional borrowing capacity as of quarter end.

Currently, we very strong balance sheet and we're well positioned in term of cash and financing capacity.

This conclude our review of Q1, 2010 results.

In summary, revenue performance was in line with expectations, we're driving continued strong profit and cash flow performance through sustainable productivity and pricing gains and we remain committed to strength our business foundation globally while delivering strong financial performance.

We're on track toward these goals in 2010.

Let's now turn to slide nine to review our outlook for Q2 and the full year.

Slide nine summarizes our full year 2010 and Q2 guidance.

Let me begin with a discussion of our outlook for next quarter.

For Q2, we're projecting revenue of $785 million to $805 million.

This reflects a 5% to 8% reported growth rate, including an estimated 2% to 3% benefit from foreign exchange.

While we are planning for continued solid storage growth our outlook incorporates expectations for lower service revenue growth in Q2.

We expect continued near term pressure on core service activity, and will be facing some difficult comparisons as we lap a large one time license sale on digital and a large project in Europe.

These factors will likely limit service revenue gains overall in Q2 and constrain overall growth to 2% to 4% range.

Growth rates in the second half are expected to improve as the comparisons ease.

We're projecting Q2 adjusted OIBDA of $218 million to $228 million, reflecting expectations for sustained, strong adjusted OIBDA margins.

For the full year, we're reinforcing the solid fundamental outlook we discussed on our last conference call.

We have reduced the dollar ranges of revenue by $5 million and adjusted OIBDA by $5 million to $10 million to reflect the impact of the Chilean earthquakes on our full year results.

As a result of the Chilean earthquakes, we experienced some damage in all of our facilities in the region.

None of our facilities were destroyed by fire or impacted by water damage.

However, the structural integrity of five buildings was compromised and [Racky] including certain buildings was damaged or destroyed.

The adjustments we're making to full year guidance reflect our expectations for loss revenues and profit as the business works to return to normal as well as additional insurance and remediation costs associated with those efforts.

For the enterprise, our full year outlook for reported revenue growth remains in the 6% to 8% supported by internal growth of 4% to 6%.

Our revenue outlook reflects expectation for solid storage growth this year, consistent with prior guidance.

We're targeted improved growth over in the business in the second half of 2010, following some tougher comparisons in Q1 and Q2.

We would note this performance at the high end of our revenue range will require improvement for current trends for service revenue in the second half of the year.

Our profit outlook remains strong with expectations for 7% to 11% growth in adjusted OIBDA and strong gains in adjusted EPS.

As noted, we're lowering our capital, our expected capital expenditures to the year to approximately $290 million reflecting refined capital plans and lower expectations for real estate spending.

Included in our capital expenditures of approximately $290 million is about $20 million for real estate.

In addition, we're adjusting our free cash flow outlook to $340 million to $370 million reflecting our revised outlook for Cap.

Ex.

and adjusted OIBDA and moderately higher cash taxes.

In April, we received a $10 million cash advance on our insurance claims related to the Chilean earthquakes that will be reflected in our Q2 free cash flow.

Although we do expect to receive additional insurance proceeds in the future, we're not including any in of our cash flow at this time because the size and timing of these receipts is uncertain.

We haven't included estimates for potential incremental 2010 capital spending related to Chile as well we're still evaluating planning and timing of remediation.

Thanks and I would now like to turn the call over to Bob.

Thank Brian.

And good morning, everyone.

As Brian noted our quarterly financial results came in as expected.

Our internal revenue growth improved some what, despite difficult comparisons and continued pressures from the economy on service revenues.

We continue to deliver strong profit growth and cash flow.

Overall, Q1 was a solid start to the year, and we're on track toward delivering strong financial performance this year.

Key messages that you should hear in today's update.

First, our financial performance remains strong.

This performance reflects the strength of our business model and the gains that we continue to drive through our focus on operational excellence across our business.

We're working on improving our growth trajectory, driving aggressively against new business with positive early results.

This emphasis will help offset continued pressures on service activity and impact from select factors such as the earthquake in Chile.

Third, we're making good progress against our strategic priorities including driving growth and improved returns in our international business, expanding our technology services offering and continuing to strengthen our organization.

Let me start by providing an update on our growth agenda.

We're making progress on the growth front despite some continued headwinds in the business, our quarterly performance was in line with expectations.

Storage growth, a key financial driver for Iron Mountain, was solid at 4%.

As expected, we saw some moderation in storage growth in Q1 reflecting impacts from lower news sales levels and higher destructions in 2009.

Destructions have stabilized.

We're working on driving new sales, we believe we're on track toward achieving our full year objectives for storage revenues.

Overall internal growth was also 4%, as benefits from factors like higher paper pricing offset continued pressures on core service activity.

Service activity softened substantially during the economic downturn and we continue it see lower transportation and shredding service levels, which was offsetting gains we're realizing in areas like DMS.

We are focused on strengthening our growth trajectory as we work through the year on factors that are in our control.

In this context, we're concentrated efforts within our organization on capturing the large unmended opportunities we see in our business.

We have a number of programs targeting and driving improved growth and have centered our field leadership on supporting this effort with the same rigor that we they use to drive operational excellence.

We're of course, also working on improving our growth rate in digital.

We've added new services like e-vantage to address evolving customer requirements for e-discovery services with added classifying and collect that allows our PC back up customer to easily identify data which is subject to legal hold and was expanded the storage capacity in our server back up offering, all which will help strengthen our recovering storage pipeline and overall revenue.

While we're still very early, we're making progress on the new sales front.

We're landed new business opportunity from the data protection space, improvement our competitiveness in shredding and our field organization is driving increased pipeline activity in records management.

In digital, we're strengthening our subscription sales pipeline, which will drive benefits in term of recurring revenue gains.

We've got work to do, but we feel positive about this early progress toward improving our new sales performance.

As we focus on improving growth trends in the near term we're also advancing on our long-term strategic agenda.

As seen in our quarter results, we continue to drive strong operating performance in our core North American operations.

The business is running well and a key area for Iron Mountain evolves extending this operating capability to drive growth and improve returns in our international operations.

As was noted, this is an area where we're driving improved momentum and one that will be a key factor supporting strong financial performance in 2010 and beyond.

We're on track for strong performance for the international business this year, we're begun deploying the North American playbook for operational excellence in our more developed international markets such as the UK and Australia.

Productivity gains in these markets will enable continued investment against global expansion while driving strong profit gains.

We're pleased with the capability and progress we're advancing on this front, and see this as an area where we can continue to build upon for the long-term.

We're emphasizing the expansion of technology services a key driver of our long-term strategy as well.

As noted on our year-end call, we recently completed the acquisition of Mimosa Systems.

Mimosa provides enterprise class on premise archiving services so organizations can better benefit from business continuity, compliance and litigation readiness.

Mimosa deploys next generation technology and complements our existing suite of products.

With Mimosa, Iron Mountain now has the ability to store enterprise information wherever it resides, whether it's at the customer location or ours offering them increase choice and flexibility for managing their information.

The integration of Mimosa is going within and Mimosa's CEO [TM Robby] has agreed to become the Head of Marketing for our digital business.

This expansion of our technology services offerings helps to strengthen our digital business, and also helps to strengthen our valued proposition across all our service lines.

See our customers records and information management challenges are not neatly arranged into silos by format.

They're struggling to manage the risk and costs with information growth across all formats and looking to solution providers with a broad range of expertise and capability for much needed help.

Iron Mountain is uniquely positioned to capture this opportunity because we work across all formats and have more experience in managing records.

The development of our technology services portfolio is positioning us well to deliver long-term growth across our business.

We're on the right tracks strategically as we remain focus on solving our customers biggest information management challenges.

Expanding our talent base is another key strategic theme for our business, this is a focus that exists for us from our frontline of operations to the Boards of Directors.

In March we welcomed Al Verrecchia, Chairman of Hasbro to our Board of Directors.

Al led a highly successful transformation of Hasbro and we'll certainly benefit from his executive leadership on our Board.

Overall, we're making good progress against our strategic agenda.

Now, before I conclude my remarks.

Brian mentioned the financial impact of Chilean earthquake.

Chile has always been a great business for Iron Mountain and their response to this disaster only further distinguishes their greatness.

All 850 of our employees is safe with, we've coordinated a worldwide effort around Iron Mountain to help them help our customers and those around the clock efforts have also included providing locally humanitarian aide.

We're very proud of their performance.

But before I take your questions, let me summarize.

We had a solid quarter was in line with our expectations.

We're on track toward delivering strong financial performance this year and we're concentrating our efforts around an improved growth trajectory while advancing our long-term strategic priority to capture the potential we see for our business.

Thanks and now we'll open the phone lines and take your questions.

(Operator Instructions).

Our first question comes from Kevin McVeigh from Macquarie.

Hello.

Kevin.

Okay.

Great.

Thank you.

I wonder if you can talk about the Cap.

Ex.

a little bit, Brian.

I know we took it down to $290 million.

As we think about that going forward, is that a new range as a percentage of rev into you or just some thoughts around the Cap.

Ex.?

Kevin, we're, we're, as you know, we talked at our investor day about a longer term goal in the range of 9%.

We still think that's a good longer term goal.

We're a bit below that currently.

We may see some moderate increases from the current levels over time, as storage growth improves, which is our plan.

But we think that 9% level that longer term goal is still a good goal for us.

Great.

And could you just quantify, how much did the weather impact the core services in the first quarter?

It was a couple million dollars.

It was focused on some the Mid-Atlantic markets, and we wanted to highlight it as an additional fact or.

It had some impact on the core service growth rate.

Great and then just one more.

I'll get back in the queue.

The Chilean earthquake the $10 million negative impact.

What did that relate to?

I know you discussed a little bit if you could just clarify for me a little bit?

.

I'm sorry go ahead.

The, the $10 million negative impact from the earthquakes in Chile, what did that relate to?

Yes they were, we highlighted two impacts one was on revenue which we stem for the full year to be about $5 million, and on OIBDA, a range of $5 million to $10 million, and the, the impact on the revenue is just expectations for some decrease service activity and some loss storage revenues.

Some of the records that were impacted basically some records fell over into the facilities and when they get comingled with other records we destroy them because we can't ensure their integrity so we may have some, we're expecting some loss storage revenue.

The profit impacts, there's some impact perfect the lost business, we're also factoring in things like our insurance deductibles and some steps we took to strengthen our insurance coverage, just given this was a significant event.

Our claim will be sizable.

We're very comfortable with our insurance coverage but we took some conservative steps just to make sure that we have adequate coverage going forward.

Great.

Thank you.

You're welcome.

Our next question comes from Andrew Steinerman of JPMorgan.

Hi there, guys.

With 4% internal growth on storage for the first quarter and 4% to 5% for the year, I was wondering if, if you think internal growth for storage is leaning forward, like in, you gave comments about second quarter overall, but do you feel like storage will stay in this kind of 4% to 5% range in the year?

If I quote you correctly I thought I heard you say that the higher level of destructions have now stabilized.

That's correct.

The storage rate, a couple things Andrew, as far as next quarter, we're expecting storage growth in a similar range to Q1.

As we've noted we're still working through some of the tougher comparisons and those comparisons should ease later this year.

The in terms of some of the key factors, destructions have stabilized, so there still at healthy levels but they're, the trend had been going up and we feel comfortable that, that thing are moving in a about thor direction than they were.

And, a key factor that's going to help us on improving the storage growth rate over time is going to be progress on the new sales front, I think the good results in that area and, that will take some time to flow through of course, but we're, we're feeling positive about our early progress.

I'm pleased Andrew with the progress we have in generating new sales.

The field lead I remember ship I mentioned this briefly in my comments has really been able to pivot and focus on driving new revenue and we've got an awful lot in a pipeline that is expanding.

The quote a performance year over year is, is much stronger, and the fact is, we've got the North American operation running very well, and it allows us to just become much more external in our focus in driving new revenue.

And also highlight our international storage is, is growing mid to high single digit.

Based on some of the progress we made, in areas like continental Europe, and expansion markets.

Australia is doing quite well, so we feel we're on a good path.

We, as you know, it takes a little time for the growth rates to change in storage, but we think we're moving this in the right direction.

Yes.

And Bob, you just mentioned new business driving storage growth to accelerate in the back half of the year, was that always part of the plan?

I mean, won't storage also accelerate as non-foreign payroll goes up?

So the flow through benefits of this, sir, takes some time, but the fact is, we feel much better about new sales this year than we did last year at this time.

And Andrew, I know you appreciate this, but I this I in terms of factors like the economy, we would expect the first things that we would see would be improvements in the more discretionary spending some of the project activity, things on the new sales front, the next benefit would be more, which, which will lag somewhat, but we would expect, service activity to improve and I think the last thing we would expect to see is kind of the flow through of the economy for storage just given that it takes some time for people to create the incremental records and to store them.

We are an archival storage business, so -- it will have benefits over time, by I just want to caution about, we're still working through some of the lag effects, and, we think we're prudent it in terms of our outlook in that complex

To summarize, we feel very good on what we can control and driving new business and believe that service activity will be rebound as the economy rebounds.

You know how strong it was in 2008 as we entered the downturn.

Excellent.

Thanks very much.

Our next question comes from Andrea Wirth of Robert Baird.

Good morning, guys.

Andrea.

I wonder if you can just address service a little bit more, the core service business, I think it was the first time that it actually hadn't posted any growth at all.

Just a little bit more on what actually kind of weakened sequentially and then how do we think about growth and how it does accelerate throughout the year.

Yes, the in terms of core service, I mean, we have been highlighting this for a couple quarters, but the the activity levels on in areas like transportation services, shredding services are, have been pressured.

The premium services.

Yes we saw greater pressure recently in through the economic downturn, we obviously are a high value proposition for our customers, and premium services like rush delivery, there was a significant decline in that, and that cost focus has continued with customers.

I think it also note that in some areas we may not have been as competitive as we needed to be.

We've been improving things like our pricing equation, I think in shredding we may have steered that a little too far, we've been making some adjustments on that front.

So net, net we're still seeing soft activity.

We're planning for that to continue in the near term.

We do expect that to improve over time, but there it will lag improvement in general economic activity and we're going to be working through those comparisons for the next couple of quarters.

Okay.

That's helpful.

Thanks and then on the IT side we've just kind of generally been hearing comments about companies looking to increase their IT spend and kind of going through more of the IT refresh cycle.

I think Gardner also recently increased their projections for IT spend, just kind of key us what you're seeing in terms of the time line for IT spending improvement and has that really changed much recently?

So Andrea, kind of anecdotal feedback spend a lot of time with customers, I don't see IT budgets going up in any kind of significant way.

What we do see is the decapitalization of the IT, which is favoring services model and out source model.

The thing about a subscription model, though is that it does while we were up 4% in 2009, it lags coming in, and doesn't have a spiky effect on revenue but we've had strong progress on new sales, and I feel very good about just from a macro perspective the fact that IT is going toward more of a pay as you use model, and that's a trend that a lot of players have to adjust to more dramatically than we do.

At least it's always been our business model.

Got it.

Thank you.

Our next question comes from David Gold of Sidoti.

Hi, good morning.

Good morning, David.

Can we speak a little bit more I know that I asked this before, on the record center optimization productivity improvement program.

Again sort of how you think about things necessarily, I know it's a moving target and I know there's more to it, and sort of how far along are we on that if we've gotten that off the ground overseas and sort of where we are there too?

We have David, so the it's essentially, we move from market to market in driving profit at this time productivity from the system we've done that throughout North America and we do it from the standpoint of sustainability so we're adding new programs as well, so we've kicked off a procurement initiative in the last quarter that, that will really focus on strengthening our gains and consistency across North America.

We have begun exporting a playbook.

Note notably to the UK, but also to other mature markets like Australia, and we feel very good that, that over time we can pursue North American like returns out of our mature international businesses.

So it's, it's in the muscle memory of the Company, and that business is running very well.

Which is why we're particularly enthused about the potential to, to grow the business through new sales because of the fact that the business is running well.

And we can be more external in our focus.

This is something that we had to work on internally for years to get into this kind of a rhythm but we feel very comfortable with where we are in that regards as it relates to record center optimization, productivity throughout our business, and realizing that on a sustainable basis.

Is there more North America that we think we can squeeze out?

Well I think we're continuing to roll out the, the process orientation, the process focus on how we manage the business, and as Bob noted we're on kind of a next phase of initiative.

Areas like procurement.

We see a lot of opportunity on our, our front end organization just how we interface with the customer and go to market, I highlight that we think there's efficiencies there we do want to re-invest those efficiencies to accelerate growth we think that's more areas to become more effective and efficient we're committed to begin to improve our profitability we think we've established very good capability in areas like pricing and just our process approach to running the business to enable us to keep making progress as we move forward, and as an enterprise, we have other areas to help us drive margin improvement.

Most notably, we think there's a significant opportunity on the international business as you know, the margins there relative to our North American physical business are currently quite a bit lower.

Some of that is the stage of development of that business, and the investments we're making in expansion markets but that also represents a significant opportunity for us, and also our digital businesses, that gains and scale so we have a number of things that we believe can help us sustain strong profit performance ahead of revenue growth as we move forward.

Yes, let's remember the primary driver behind this, right, while we always knew that we would be able to be more effective than therefore produce stronger operating margins as a result of pursuing uniformity, the primary driver would be so that we will establish a level of value in the marketplace that, that we can then drive through new sales, and the value proposition that's really unmatched in our business.

Perfect.

Thank you both.

Thanks.

You're welcome.

Our next question comes from Vance Edelson of Morgan Stanley.

Thank you for taking the questions.

First in terms of recycled paper, could you comment on what you're seeing on the front lines in terms of your ability to sell the paper as you're volume builds, are you able to secure favorable pricing?

Can you work directly with large buyers of the commodity for example, or would you say you're essentially be holding to whatever the spot rate is?

We have, we have relationships with companies like Waste Management significant partners to help us manage that, and we, that helps us to, I think, have I a secure avenue for sales over time.

Our pricing is impacted by the spot market, so it's -- we do see fluctuations in the pricing levels over time consistent with the market, but to get at your question, Vance, we're quite comfortable in our ability to secure buyers for the paper.

Okay.

Got it.

And on the capital spending priorities going forward, would you say that will largely mirror the first quarter break out?

In other words, mainly storage and maybe half that amount on IT?

Any changes to the mix anticipated?

Our outlook for this year is, is similar to our long range goals.

I mean, the bulk of our spending is related to storage systems that support growth, so that's physical and digital, and a smaller percentage of our spending is on things like IT and strategic initiatives and infrastructure, but the bulk of our spending remains related to growth and capital.

Makes sense, beyond the established international markets where you still have room for growths what the latest for international expansion into brand new less developed markets what regions are you really looking at to create a first time presence now.

To create a first time presence, Vance, if you look where we're not, we're still not in Japan.

We're not in Africa.

We're not in the middle east.

And those are areas that we're, we're always looking for the right joint venture partners to enter the market with.

We're most successful when we go into with a local partner that knows the local market.

China is an area that you could argue we have some flags planted but there's a lot of opportunity for us to improve our presence in that region and we've recently brought on some tal even to help us do that.

Okay.

In the more developed markets is there room for contiguous expansion to drive revenues it's more a matter of increasing density and penetration in the geography that you already have.

Yes specifically if you look at Brazil, Russia an India, we have very good businesses that we think Brazil is expected to really, its economy is expected to move up the stack rank if you will, in the next few years and we think that's something that we can take advantage of.

Russia we have a great business in our joint venture partners and we're very pleased with the way that's going.

And there's, remember, that there's a ton of room in continental Europe as well.

We're still in the early stages of scaling these individual countries because unlike North America Spain is different from, from Germany, which is different from France, and we have those businesses still have a lot of room for improvement.

Okay.

And it's in a time scale of measured in years, you'll see more improvement there than you will from markets where we're just entering.

Got it.

Okay.

Thanks for the color.

Sure.

Our next question comes from John Healy of Northcoast Research.

Thanks for taking my question.

I want to talk a little bit about North American physical revenue growth in the quarter.

I was curious if you could give us a little bit of color in terms of maybe the component of growth, kind of how much you're seeing from activity levels and creation and maybe how much you're seeing from a pricing stand point?

Just in terms of storage it was solid.

We noted it was 4%.

We are getting benefits from pricing to support that, but we, we are driving positive volume as well.

It's obviously moderated from what we're used to driven by some of the impacts last year.

The higher destruction rates and the softer new sales, and but overall we're continuing to drive solid storage revenue growth and we're looking to improve storage revenue growth and we're looking to improve that as we move forward.

The service activity was supported by a couple of factors.

Obviously, improved paper pricing.

We are seeing very good growth on the DMS front, and those factors are, are offset by the softness that we see on service activity levels, and also kind of on a select basis, some of the more traditional project work that we have done that isn't related to managing hybrid records, but, which we think is indicative of just kind of softer activity in some of the sales pipeline that's soften last year.

On balance it's solid growth in line with what we were hoping to achieve and we're working on the things that we think that we can improve that over time and position us well for when we see some of the benefits of the economy improving.

Great.

And Brian I thought you mentioned a prior question that the first thing you'd see is some of the discretionary parts of your business to show firming before, other parts would.

If you were to exclude the impact of recycled paper prices in the complementary service lines, would you be starting to see that kind of discretionary element of the business picking up or have you got it to experience that?

No we are.

We are seeing that.

It was, it was positive in the first quarter, and that was supported by, by DMS.

Also by our E discovery business but that is a favorable factor.

It's moving forward sequentially, I don't want to give you the impression it's turned around quickly.

It's moving in the right direction, but those early indicators, we are seeing some of the positive factors and I just, I need to be the voice of caution here I just want to make sure people know, it take some of the time for some of the benefits to flow through our business and we're going to be working through this the next couple of quarters we do see some signs it's moving in the right direction and we're working on things to help that.

John, we lag into the downturn and we lag coming out of it.

It's just the nature of our business model.

No it's encouraging that piece is at least poking its head up a little bit.

Lastly on the sledding side of the busy I thought you mentioned you may have changed a little bit in the price and value proposition.

Can you talk a little bit about maybe how the business performed excluding recycled paper prices in the quarter and what you think a realistic growth rate for that business could be this year?

Yes.

No, let me, why don't I, I start and let Bob add color on the business.

The revenues in the business were up solidly in Q1 supported by paper.

It's a little difficult to, to separate paper from the overall business because as you might imagine, the competitive dynamic is that flows over of into the overall economics and influences how you would price you're services and things of that nature.

Our service revenues were down moderately, but overall, it was, it was a good quarter for shredding.

And we think we can have solid growth in that business this year.

Again aided by some of the macro factors, Bob, do you want to talk about some of the dynamics?

Yes.

Listen, John, this is an area where I think we're constructive li dissatisfied with the way we competed last year and we think we allowed our competition some entry and we're being more aggressive now and I believe we'll see the benefits of that because we have a value proposition that is differentiated from that of our competition.

Especially as it relates of chain of custody and we have specific programs in place that allow our sales force to really attack of competition, where we let them, we gave them a little bit of room last year and we shouldn't have done that, but we've also working through channels here, so you can expect to see announcements from some of our partners, specifically in the commercial real estate space, and some of the, well, and more to come on that, but where people see the usefulness of offering sledding to their customers whether it be in a office space or other locations that, that we'll hope to announce later in the year.

Perfect.

Thank you.

Our next question comes from Eric Boyer of Wells Fargo.

Hi thank you.

Yes I suspect that you want, but do you expect any change in seasonality patterns for total consolidated results now that the European business will have a calendar year-end?

Not from the European change.

In fact.

The way, one of the conclusions as we went through this process, which was significant amount of effort for the team to kind of do the assessment on this and get us to a play where we're fully aligned in terms of our reporting globally, one of the conclusions was there.

A material effect from the seasonality change that enables to keep the change relatively simple and have a one time charge flow through the other expense line.

So short answer is no.

There shouldn't be an effect.

Okay.

Great.

And then with the situation like the, the winter weather that was experienced in the, in the first quarter will any of that revenue be pushed out into the second quarter or is the majority of that that type of service just service revenue lost?

Hard to assess but I wouldn't count on that being push out.

I think that's related to normal activity that didn't happen, and we're not expecting --

When they come back to work they don't do twice the work

So that shouldn't be a benefit.

I think the key thing on the service side to recognize is, which we tried to highlight is, one up theme is the core service activity remains soft and we're planning for that to continue in the near term.

That we are against a couple tough comparison in Q2.

We had a big project in Italy last year that was very beneficial we're working through the lapping on that and we have a large license deal in digital.

So there's a couple factors that are going to moderate growth.

You know paper pricing came down 15%, so that, that's less of a benefit, but net net I think over will all in the business, we feel good.

We've got the storage moving an on a good track and we're seeing some positive signs and we're looking forward to getting through some of the transition phase and getting to a stronger growth rate moving into 2011.

And then with the subscription weakness within digital, which type of the digital subscriptions would you expect to come back first and are you seeing any positive signs that that's happening?

Yes we're departmentally seeing positive signs, Eric as it relates to the pipeline specifically around E discovery is is a very strong business for us, we're very, very pleased with Mimosa and our back up options have become more competitive I've mentioned quickly in my remarks we've added capability to our back up offerings that we think open up the market opportunity for us an we're seeing the right progress out of our sales forces as it relates to driving increased activity in pipeline and we have enough analytics on that to know that it will flow through.

Keep in mind it's a subscription model, right, so we don't get the lumps that, that come positively or negatively with being a perpetual license business, that you'll find in many technology companies.

Year in year we're seeing solid growth in the subscription pipeline, so we'll look for that to benefit our results going forward.

Great.

Thanks a lot.

Sure.

Our next question comes from Scott Schneeberger of Oppenheimer and Company.

Hi, good morning.

This is (inaudible) actually sitting in for Scott Schneeberger.

Good morning.

Good morning.

My first question actually if you guys can give some color commentary on your industry verticals for 1Q, and if possible what do you see going into 2Q?

We, we don't report on a granular basis.

I would say that in terms of verticals we're very focused strategically in areas like healthcare and government in term of our long-term growth rate and we're pleased with the progress we're make on that front.

Financial services is obviously a big, a big vertical for us, and -- I would not highlight that we're seeing substantially different trends across our verticals I think they're relatively consistent on the business.

You're on right track, though as relates to the opportunity we've faced.

We've seen a lot of useful in building our organization to really drive depth into these industries that are highly regulated with a lot of knowledge workers, so think financial services, healthcare, legal, and you can see through our service offerings that that we're can see through our service offerings that that we're becoming more verticalized and you can expect that, that we'll become more verticalized in our approach to the market over time, but it won't, we won't break out.

We don't expect to break out the results specifically by quarter.

Oh, okay.

That's fine.

My follow-on question actually was the fuel prices are up like year over year quite significantly.

If you guys can just give us some color on like overall energy costs?

Overall energy costs remain in the 2% to 3% range.

It wasn't a big driver of our margins one way or the other, and we just highlight keep in mine to the degree that energy costs go up, we do get the benefit of fuel surcharges which have have not been materially recent quarters if we saw a consistent increases on that front, we'd have some ability to offset that with the fuel surcharge.

Okay.

Thanks a lot.

At this time, there are no further questions.

Are there any closing remarks?

Very much appreciate your time this morning.

And we feel very good about the business.

We feel very good about our prospects and look forward to reporting to you again next quarter.

Thanks for your time today.

This concludes today's conference call.

You may disconnect.