鐵山公司 (IRM) 2011 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Iron Mountain first-quarter 2011 earnings call webcast.

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

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

(Operator Instructions) Thank you.

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

Stephen Golden, Vice President of Investor Relations.

Thank you.

Welcome, everyone, to our 2011 first-quarter earnings conference call.

Joining me this morning are Richard Reese, our Chairman and CEO, and Brian McKeon, our CFO.

After their prepared remarks, we will open up the phones for Q&A.

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

Referring now to Slide 2, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2011 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 you know, we also use several non-GAAP measures when presenting our financial results.

Adjusted OIBDA, adjusted EPS, 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 provide additional information and the reconciliations 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'd like to introduce Richard Reese.

Thank you, Stephen.

Good morning, everybody.

Welcome to our first-quarter 2011 quarterly earnings call.

As you know, I haven't done these calls in a few years, so this is my first one back and I'm happy to tell you that we have good performance to report, even though I didn't have a heck of a lot to do with it, since I've only been back on the job for a couple of weeks.

But the team has done a great job, the business is running well, and we are off to a good start to hit the plan that we put forth in great detail last week, the three-year strategic plan.

As we've shifted our business into the third phase of our long-held three-phase strategy, that phase of capitalizing on the hard work we did in the earlier years in the investment cycle of the business, building it up.

We are now turning to reap the rewards of that on behalf of our shareholders and the rest of our stakeholders in the Company.

So, today I will talk briefly about the results for the quarter, and then turn it over to Brian, who will give you great detail, and then we will come back and take your questions.

And I am going to review the quarter, frankly, a bit in the context of the plan.

So, it was a good first quarter.

We are off to a good start, and it gives us confidence that we will be able to achieve our goals for the entire fiscal year.

Revenue was up 3% to $799 million, and that was on the back of strong storage revenue growth, the 5% reported and really, 3% internal growth which is an uptick.

We are seeing a continued trend of steady improvements on units for storage, supported by lower destruction activities and strong new sales, particularly in North America, as the investments we've been making according to our plan are paying off.

We also have seen some continued weakness in some of our recurring service lines, and of course, when destructions are down.

The good news is it helps storage over the long run, and the bad news is it's a little light on services in the short term, but it is a trade we would take all the time.

So, in general, I think as a Company we're feeling better about some of the trends, and starting to see some of the changes from the economy.

But I want to be very, very careful to caution you -- this is a business that moves very slowly.

That is its strength and its weakness.

And I would caution anybody from taking these positive signs and trying to forecast up.

What we are telling you is we think we are going to be in line with our expectations for the year, and we have a lot of confidence that we will be able to do that.

So, with that -- well, let me just take you on down a little bit.

The other reported numbers, the adjusted OIBDA is up 4% on an operating basis, really a little less on a reporting basis because that would exclude certain one-time expenses that Brian will go through for you in detail.

And adjusted EPS is up 24%.

So, as I said, a good start for the quarter.

We have pretty good confidence, or even better than pretty good confidence for the fiscal year, assuming things continue in line, and we'll get through the details as we go.

If we look at some of the pieces, and as we said last week, we put forth a three-year plan.

The key elements of it was an acceleration into the third phase of the capitalization phase of our business.

And it had a variety of components, but by and large we put a stake in the ground on a couple issues.

One is to increase our after tax return invested capital by about 330 basis points, up to 11% by 2013.

And two is just to return to our shareholders in the form of stock buybacks and/or dividends $2.2 billion of cash, with $1.2 billion of that coming in the next 12 months.

These commitments have not changed.

You will hear us continue to talk about them over the next couple of years as we deliver on them -- report against them as we deliver on them.

If we take the business apart, North America is following the strategy.

It is the market leader, as I've spoken of it many times.

It is the goose that laid the golden egg.

And so, our strategy is to make sure we take care of the goose and invest in her correctly, so she can continue to lay the golden eggs.

And that was a combination of maintaining and sustaining margins while, at the same time, investing some in sales and marketing to increase the growth rate, or at least to keep the growth rate on the trajectory and overcome any secular trends that may be out there.

And first quarter reflected these trends very well.

Our storage internal growth was 3%, that's up from a 2% number of last year.

Our contribution to our new sales in our records management business North America from our sales force, the so-called new from new, is almost double what it was the first quarter of last year.

So, the investments we started making towards the end of last year and the change in focus is paying off, and we would expect it will continue to pay off.

Again, I will caution you that it takes a while for all of this to flow through our reported numbers on an annuity-based business, but we like the trends we are seeing and we would continue working those trends.

On the International front, the strategy is to continue the growth that we have seen, because that portfolio has driven good growth.

While, at the same time, we will look to improve the operational side of the portfolio as well as returns on invested capital.

And the growth did continue.

On a reported basis, International revenues are up 10%, driven by 6% storage internal growth rate.

The other big news is that the plan calls for 700 basis points of margin increase over three years.

We are looking in International to get nearly 200 basis points of margin this year.

You didn't see any of it in the first quarter.

We expect strong margin growth in the UK, and that is coming off the back of investments that we started, some last year, so we expect them to flow through this year.

But we have some lapping effects and some comparables that we need to get out of the way, but as we get into the year we fully expect to see the margins flow through there.

We are making some investments in Latin America now, which will yield some benefit towards the end of this year and into next year.

So, we haven't started showing the margin improvement yet in International, but we feel very good about what we are seeing and the investments we are making and so forth, the pay back we are seeing.

But the numbers -- it will take a couple of quarters for them to flow through for you to see them, but from what we can see things are going fine.

On our Digital business, as you know, we announced that we are evaluating strategic alternatives and we are deep into that process.

We have nothing new to report today, except to tell you that our Digital business had good performance in the first quarter.

And I appreciate the team really focusing on the business, and not just maintaining it but continuing to grow it.

Revenues were up solidly in all of our product areas except for eDiscovery.

And eDiscovery had a great quarter of bookings, but in that business the bookings lead the revenue by a couple or three quarters, so we are showing weaker revenues off of bookings about three quarters ago, and it will take some time period for the stronger bookings to show through in our numbers now.

But we like the trends we see in the business, and we like the performance.

We've been able to right-size our cost structure, so our profits are up in the business.

And as I say, we are maintaining good performance in the business even as we look at strategic alternatives, and I think the team's doing a great job in doing that.

The other big news that we announced in our plan, as I said earlier, was our commitment to return $2.2 billion to our shareholders in various forms of payout.

This would come primarily from our operating cash flow in the future -- free cash flow.

But it does include a small change in our leverage, taking our leverage ratio, total leverage from around 3.0 to around 3.5, which is a relatively small move.

And I want to make sure that everybody understands that we are not going out and over-levering the business.

We are doing what we think is prudent, and what we think makes some sense.

And the Company still has substantial liquidity and substantial capital available to it to execute its plans.

We have nothing new to report on how we plan to pay that out, except that since we've spoken publicly about it last week, we have gotten a lot of input from shareholders, which we do appreciate and we will try to factor that input in.

As you might can imagine, it's a little bit of some people would love us to turn left and others would love us to turn right all at the same time, and we will try to figure out how to walk down both sides of that train track and make it work.

But by and large, we will take your input, but we will do what we believe makes the most sense and try to explain it to you, and if you disagree we will be happy to listen to that, too.

This is -- I want to stress to you, the fact that we are putting out $2.2 billion in a fairly short period of time, is a shift and is a change, but it is not the end.

And I think one of the things we -- and I want to help the market, over time, come to grips with -- this is the beginning of a pattern, not the end of a pattern.

This business will throw off a significant amount of cash back to shareholders for as far out as I can see, and in fact, failure to do so would delever the business to zero, in not too long a time period.

And just to even maintain a prudent leverage level, which is prudent in our capital structure, to maintain a good weighted average cost of capital for our business and so forth, we will have to distribute a significant amount of capital, in addition to making the right investments back into the business to continue the ability to do that for a long period of time.

So, we are in a point in the business that I've been waiting on for a long time, and I guess to some extent, although retirement was looking awfully attractive, being back at this stage of the business also has its fun.

Because figuring out exactly how to do this stuff is pretty interesting and pretty challenging, and I think we are going to have a good time trying to figure out how to give you cash back.

So, with that, as I said, good quarter.

We are off to a good start.

I hope they're all this easy from a call perspective, and I appreciate the team making my first entry back in fairly easy for me.

Let me turn it over to Brian, and then we'll come back for your questions.

Thanks, Richard.

Good morning, everyone.

I will start today's review on Slide 3, which highlights key messages.

First key message is that we delivered solid operating performance in Q1, and it's putting us on track for our full-year goals.

We saw solid storage trends, including benefits from new sales initiatives that supported 3% revenue growth in the quarter.

Overall storage revenues increased 5%, or 3% on an internal growth basis.

The International business again posted strong storage results, and both our North American and Digital segments showed improvement.

Revenue growth is benefiting from sales and marketing investments, as Richard mentioned.

In fact, in Q1, storage volume additions from new sales in North America was the highest it's been in more than two years.

Profit and cash flow gains remain solid as well, supported by improvements in our International and Digital segments.

Adjusted OIBDA was $222 million, it's up 4% on an operating basis, excluding $4 million of advisory fees and other costs that were related to the recent proxy contest.

Adjusted EPS was $0.26, which is an increase of 24% compared to last year, and free cash flow increased 7% in the quarter to $58 million.

We are off to a good start, and we're making some positive adjustments to our full-year operating forecast to incorporate positive FX changes and our Q1 performance.

Given the recent announcement of our comprehensive strategic plan, including the potential sale of the majority of our Digital assets, we will be taking the following approach with respect to our full-year 2011 outlook.

We are going to forecast the business as it exists today.

Therefore, our current outlook does not reflect any impacts from the strategic review of our Digital business, including a potential sale as contemplated in the strategic plan.

Our current outlook also does not include any impacts from business or revenue risk, transaction costs, or other costs associated with the ongoing strategic alternative review process.

Finally, our outlook does not include any cost or increased interest expense associated with potential future financing events that may be contemplated in the strategic plan.

We will update our outlook when we have more clarity around strategic alternatives for our Digital business, or potential financing transactions.

Within this framework, we are raising our revenue guidance.

We are also updating our adjusted OIBDA outlook to reflect these revenue gains, as well as the estimated advisory fees and other costs associated with the recent proxy contest.

And I will speak to these more fully in the outlook section of my remarks.

Let's now turn to Slide 4 and begin with the review of the financial results.

Slide 4 compares our results for this quarter to the first quarter of 2010.

As noted, Q1 was a solid start to the year.

Enterprise revenue growth was 3%, up from Q4, reflecting improved storage revenue growth, and benefits from favorable FX and recent acquisitions.

Enterprise revenue gains were supported by improved storage revenue internal growth of 3%, and expansion of hybrid services.

These gains offset continued softness in core service activities and lower eDiscovery revenues.

From a segment perspective, North American Physical posted 1% internal growth supported by 2% storage internal growth, hybrid service gains, and benefits from higher recycled paper prices.

These gains were partially offset by continued soft core service revenues, in part reflecting lower levels of destructions and reduced special project revenue in the quarter.

Revenues for our International Physical segment grew 10%, supported by 4% internal growth, benefits from our recently announced Polish acquisition, and favorable foreign exchange rate changes.

Storage internal growth for International remains strong at 6%, reflecting gains across all regions, including continued strong growth in expansion markets.

These gains were augmented by strong growth in hybrid service revenues.

Total service revenue growth was constrained by lower core service activity levels.

In our Digital segment, reported revenues declined 5% in the first quarter, primarily reflecting lower eDiscovery revenues, which more than offset storage gains.

Overall, we continue to post solid comparable profit gains.

Gross profits grew 4% in Q1, reflecting a 40-basis point improvement in margins.

Higher storage gross margins, particularly in the International and Worldwide Digital segments drove the improvement.

These gains more than offset lower service gross margins resulting from eDiscovery profit declines and moderately higher transportation costs in North America.

Adjusted OIBDA grew to $222 million, up 2%, or up 4% excluding the $4 million in one-time fees associated with the proxy contest.

Solid gross profit gains were partially offset by planned investments in North American sales initiatives, and productivity initiatives in the International segment, which we expect to yield substantial benefits as we move forward.

Below the adjusted OIBDA line, depreciation was $79 million, and amortization was $10 million.

Other income for the quarter was $9 million, including $3 million of FX gains and a $5 million gain on our Polish transaction.

Adjusted EPS for the quarter was $0.26 per share, an increase of 24% compared to the prior year, reflecting solid operating performance, lower interest expense, lower structural tax rate, and fewer shares outstanding.

Reported EPS for the quarter was $0.37 per share, including the $0.12 per share impact of the $9 million of other income, and a lower effective tax rate.

The structural tax rate for the quarter was 38%, and we expect the structural tax rate for the full year to be about 39%.

Let's now take a closer look at our revenue growth on Slide 5.

Slide 5 breaks down our overall revenue growth.

It shows internal growth by major service line, as well as the impact of acquisitions and divestitures and foreign exchange, compared to our 2011 full-year outlook.

As noted, overall revenue growth in Q1 was 3%, on track with our full-year growth outlook.

Improved storage gains of 3% offset service declines, netting to 1% internal growth in the quarter.

The storage revenue growth rate reflects continued strong performance in the International segment, and improved new sales in North America.

Net global records management volume growth increased about 2% year-on-year in Q1.

We will break down key drivers of this change as part of today's review.

Pricing trends remained consistent, with net pricing gains of about 2% in North America records management.

Core service revenues were down 1% in the quarter, reflecting continued soft core activity levels, in part driven by lower destruction activity.

We continue to experience service activity declines in areas like retrievables and re-files, and in tape back-up activity, as customers have moved to a less frequent tape rotation cycle.

Complementary service revenues, which represent about 13% of total revenues, decreased 5% internally in the quarter.

Results reflected lower eDiscovery reported revenues, and lower special project revenues, in part impacted by the lapping of a large project in the US.

These decreases offset strong gains in hybrid service revenues and benefits from higher recycled paper pricing.

Let's now turn to Slide 6 to review global volume growth trends.

Slide 6 shows key drivers of global record and management volume for the last three-plus years, to give you a sense of recent volume growth dynamics.

This chart shows annualized changes in quarterly records management volume as a percentage of the beginning cubic feet related to new sales, volume growth from existing customers, offset by outgoing volume [or churn].

Revenues associated with physical records management storage drive about 40% of overall enterprise revenues, so trends on this front are meaningful.

Overall, global records management volumes have stabilized following impacts from the economic contraction, and are starting to show some signs of improvement.

There are a few key take-aways from this trend analysis.

First, the economy had a meaningful impact on records management volume trends in our business in 2009 and 2010.

We experienced a significant increase in destructions related to cost-savings initiatives, as well as a lagging impact from longer sales cycles and a reduced incoming volume due to high unemployment rates.

Within these results are also ongoing secular impacts, as new volume from existing customers continues to moderate slowly.

Our focus has been on improving new sales performance in North America, supported by targeted investment, and in expanding our business in faster growing regions internationally.

We are seeing positive momentum on these fronts.

North American new sales contributions has been rising steadily in recent quarters, with Q1 volume additions from new sales at its highest level since 2008.

It takes time for new sales benefits to flow through our annuity, but we are on good track with our go-to-market initiatives.

This progress is consistent with our long-term plan goals for North America, specifically to increase sales to offset secular impacts and sustain the North American annuity.

International growth is continuing at a solid pace, with volume up 6% year on year in the quarter.

We saw year-on-year volume gains across all regions, supported by strong growth in expansion markets like Central Europe and Latin America.

Storage progress is also being supported by some moderations in destructions and churn globally.

We expect quarterly fluctuations on this front, driven by episodic customer actions, but overall these impacts have settled into a stable range.

In sum, some of the negative trends we have been experiencing have stabilized, our investment focus is reaping gains, and we are growing the storage annuity consistent with our long-term strategy.

Let's move now to Slide 7 and review our results on a segment basis.

Slide 7 shows key metrics for each of our four segments compared to the first quarter of 2010.

North America remains our financial engine, and we are building momentum in International as a driver of profit and cash flow gains.

North America continued to drive high profits and strong cash flows in Q1.

Revenues increased 1% on 2% storage revenue gains, and increased hybrid service revenues.

Adjusted OIBDA margins in our largest segment were sustained at 41% on gross margin gains and controlled overhead spending, which supported planned investments in sales and marketing.

Capital efficiency continued to improve with CapEx as a percentage of sales decreasing to below 4%.

Our International segment continues to post solid revenue, adjusted OIBDA, and cash flow gains.

Internal growth for the quarter was 4%, driven by continued strong storage internal growth of 6%.

Adjusted OIBDA grew 10% in Q1, in line with reported revenue gains.

We are targeting strong improvement in International margins in 2011, supported by profit gains in the UK, and expansion of operational excellence initiatives in Latin America.

Gains in our physical business helped offset lower Digital revenues.

Lower revenues and gross margins in our eDiscovery business constrained Digital financial gains in the quarter.

These impacts were offset by cost control initiatives, which drove a 25% increase in adjusted OIBDA in the segment in Q1.

The increase in corporate expenses primarily reflects one-time costs associated with the proxy contest.

Let's turn to Slide 8 to review our debt portfolio.

Our balance sheet remains strong, reflecting the substantial improvements we've driven in cash generation in recent years.

Currently, our consolidated leverage ratio is 3 times, at the low end of our target 3 to 4 times leverage range.

We are well-positioned in terms of cash and financing capacity.

At quarter end, liquidity was approximately $760 million, with $190 million in cash and $571 million in additional borrowing capacity under our revolver.

During the first quarter, we repurchased 384,000 shares of stock, at a total cost of $11 million.

At the end of the quarter, as of March 31, 2011, we repurchased 5.1 million shares for a total cost of approximately $122 million.

At quarter end, there was approximately $228 million remaining under the existing share repurchase authorization.

Our debt portfolio is long and fixed, our weighted average interest rate was 6.6%, and we were 80% fixed at quarter end.

Maturity is just under seven years with no bond or repayments due until 2014.

In January, we used excess cash and borrowings on our revolver to redeem the remaining $231 million of our 7.75% senior subordinated notes due in 2015.

This transaction will reduce our net interest expense by approximately $17 million in 2011.

Looking at our maturity schedule, we have approximately $192 million borrowed under our revolver, which matures next April.

We expect to refinance our senior credit facility in 2011.

The strength of our balance sheet reinforces our confidence in advancing the shareholder payout commitments outlined in our strategic plan.

Let's now turn to Slide 9 to discuss our 2011 full-year outlook.

Slide 9 highlights our approach to our full-year outlook in 2011.

As I mentioned earlier, we are forecasting the business as it exists today.

At this point, we don't have enough clarity around the final outcome of the Digital process or our financing options to provide a forecast of those events.

Our current outlook also does not include any business or revenue risk, transaction costs or other costs we may incur as we work our way through the strategic review process for Digital.

We expect to have greater clarity in both of these areas during the coming quarters, and will update you on our progress when appropriate.

What is included in our current outlook is approximately $15 million of advisory fees and other costs related to our recent proxy contest.

These costs include legal and professional advisory fees, severance costs, estimated costs for the upcoming REIT analysis, and other related expenses.

Let's turn to Slide 10 for a look at our outlook for 2011.

Slide 10 summarizes our full-year 2011 financial guidance.

We've increased our enterprise revenue outlook by about $45 million, to be in the range of $3.220 billion to $3.285 billion, up 3% to 5%.

This reflects our solid Q1 performance and the impacts of favorable foreign currency rate changes.

We now expect FX to add about 2% to this year's revenue growth rate.

We are now targeting adjusted OIBDA of $938 million to $966 million.

This includes the $15 million of estimated costs associated with the recent proxy contest, which more than offset the flow-through benefits from our outlook for increased revenues.

This range represents reported growth of minus 1% to plus 2%, including previously announced incremental sales and marketing investments.

Excluding the $15 million of advisory and one-time fees, adjusted OIBDA growth will be in the 1% to 4% range.

Please note that we will face some tougher adjusted OIBDA comparisons over the next three quarters related to low incentive compensation accruals in 2010.

In Q2, this will result in a $9 million increase in reported costs.

We also expect too about $6 million in fees and other costs related to the proxy contest to be reported in Q2.

Our current outlook is for adjusted EPS -- our full-year outlook is for adjusted EPS to grow between 1% and 8%, to a range of $1.16 to $1.24 per share, reflecting the adjustments described above and refinements to our outlook for D&A and interest expense, including impacts from recent FX changes.

D&A is now expected to be approximately $352 million.

Interest is expected to be $204 million.

Our full-year forecast assumes 201 million shares outstanding.

This reflects the level of shares outstanding at the end of Q1, including increases to dilutive impacts from recent increases in our stock price.

We are keeping our full-year free cash flow outlook at $375 million to $410 million, and updating our outlook for capital expenditures, which are now expected to be $235 million for the year.

This capital outlook includes about $15 million for real estate.

Finally, as noted on the slide, our current full-year outlook includes approximately $190 million of revenues, $20 million to $25 million of adjusted OIBDA, and about $15 million of capital expenditures related to the digital service lines currently included in our strategic alternative review process.

In summary, Q1 was a solid start to the year, and we are on track towards our full-year goals for improving revenue growth, and continued strong profit and cash flow performance.

Thanks, and we will now be happy to take your questions.

Thank you.

(Operator Instructions)

And our first question comes from Andrew Steinerman of JPMorgan.

Hi gentlemen.

Welcome back, Richard.

Internal growth guidance for 2011 is unchanged even though you were up in your revenue guidance?

Or, why don't you comment on that?

Is it zero to two?

It is still zero to two, Andrew.

We are feeling good about the storage outlook and the core services continues to be soft, so they are offsetting somewhat.

But -- on balance we are feeling good about the trends, but I think some of the softness in core service activity is leading us to a similar range.

And, I think I heard Richard say they were kind of part and parcel.

As we are getting better on revenues on storage, it's because destructions are stabilizing and that is going to hurt service.

And so, it's -- the two are almost related.

There is some of that dynamic.

And, that's a good news dynamic over the long run.

There is also weakness in other services, and just our general retrieval refile activity and same thing in the data protection activity.

We are still seeing activity lower even though we are seeing storage pick up some.

Makes sense.

And last point, just to make sure we get this right, it sounds like you are still committed to hybrid services even though you're looking for alternatives in digital, is that correct?

Absolutely.

And, I want to stress that we are looking to transition to a different model in digital, not necessarily exit all of the services.

In some, we might do it with the same technology on a license back basis, some we might perform with different technologies on a license basis.

But, the digital business -- and this is probably a story for a later date, because it's a longer story -- is a good business, and we've learned a lot in it.

But the model we had -- just did not make sense to us to maintain it and we think those assets are more valuable to other people.

Yes, just highlight, too, as you know, Andrew, the hybrid services are very close in to our core business.

It is helping customers with their transitioning, where they are working with physical records and it's a -- business is going really well for us.

And we feel good about it.

And I think you will see that over time, that we will speak less of hybrid and not of digital, but we will talk to you about physical logistics services, and we will talk to you about technology product lines, not business units and so forth.

Okay.

Thanks, guys.

Thank you.

Our next question comes from Gary Bisbee of Barclays Capital.

Hi, it's Zach Fatum for Gary.

You say that you expected 200 basis point increase in International Physical adjusted EBITDA this year.

Can you give us some additional color on the expected drivers for this gain?

Yes.

A big driver this year will be in the UK.

We have been working for some time with the International team incorporating the North American play book, and we are targeting meaningful increases in our -- We have good margins in the UK, they are moving that much closer to North American levels, and we will see those benefits flow as we work through the year.

We are exporting the same play book to other markets, too.

We do have some investment that goes along with that as we gear up the teams and invest in the process redesign that goes along with yielding those benefits.

And that, along with some lapping impacts, constrained the gains in Q1.

But you will see the benefits flowing through as we work through the year, and we feel -- our outlook is based on a strong improvement in International margins overall.

And it is not just this year, that's the multi-year plan.

We will continue to drive that as we move forward.

Okay.

And regarding the expected modest increase in leverage, would you expect to stick with your recent history of largely fixed-rate debt or would you consider floating rate borrowings?

We will consider whatever makes sense in the market at the time.

I have always had a bias for a large amount of fixed-rate debt.

At this stage of our cycle we may be over fixed, and I think it is something we will look at in a variety of ways.

Okay.

Thanks a lot, guys.

Thank you.

Our next question comes from Vance Edelson of Morgan Stanley.

Hi, and thanks for taking the questions.

Are there any metrics you can provide now regarding the number of digital customers, the number of hybrid customers, or any metrics regarding the percentage of customers subscribing to multiple services, such as physical, digital and shredding?

We have the numbers.

We don't have them in front of us.

It may be something we can dig up for a future discussion with you or something.

No problem.

I mean, the trends are that we have more crossover selling, obviously between our records management and our data protection services, as well as our records management and our shredding services.

And we've had good success across selling there.

And we've, on a named to customer basis, we've got pretty good success crossing over to digital, but it's a different buyer for sure between our physical and digital business.

The other thing I would also tell you that part of what we learned in the digital business, though, even though it was digital buyer that our brand would translate and that although not all the IP buyers -- I think they all have a perception of who Iron Mountain is, and so forth, that didn't have a strong perception of how broad a product or service line we had.

So, we had to sell it.

But having said all that, we proved we could sell it.

In fact, more than half of the revenue we have in digital today was internally grown revenue not purchased revenue.

So, we know the market will accept these things from us and we've got other research as well as these data points to say it.

Okay, that makes sense.

And you mentioned the higher transportation costs in North America, what about internationally?

Are you feeling the same pressure abroad and, if so, is that having a meaningful impact at all on the margin expansion story there?

It's a smaller factor in terms of our overall cost structure.

Transportation is less than 2% of our revenues.

We do have some cushion against that with fuel surcharges.

Right now -- It tends to lag.

How the fuel surcharges kick in is based off an index, so what we've seen in Q1 is the cost is up but not yet the benefit.

The full benefit of the surcharges flowing through, I think that will improve as we work through the year.

So, on balance, it should be less of an impact of our economics but it is affecting us in the short term.

Okay, that's helpful.

And maybe one last question, regarding the aim to buy back a more significant number of shares.

I guess for now you can at least act under the remaining $228 million from the previously authorized buyback.

Is there any blackout period or other technical or legal reason that you need to wait for to buy back more shares, or is it more that you could start buying immediately if you wanted to?

Yes.

There is a whole bunch of technical legal reasons, open windows and so forth -- we will come into an open window by our own policy next week.

And yes, we do have some in a buyback.

We really, though, are focusing --I mean, we've got shares authorized -- we are focusing on trying to set up the right strategies in the right plans.

So, it's a little early for me tell you exactly how we will do it.

As you probably know, there's all kinds of tools and techniques, and we spend a lot of time analyzing those and we're still coming to the decisions of what's the right way to execute it.

Okay, that's great.

Thanks, guys.

Thank you.

Our next question comes from Andrew Wittmann of Baird.

I thought some of the commentary you had on the North American sales initiatives was interesting.

I wanted to dig a little bit more into that.

Perhaps could you just quantify what the SG&A investment was in that, maybe for this year?

And then, more broadly speaking, give us your sense of where you think the returns are on that investment?

You said it was holding you back a little bit in the first quarter but traction has been good.

Is there a long ramp ahead for those presumably sales people where they are just starting to break even and there's a lot of upside from here?

Or how would you characterize that?

Let me try to take the first part of the question, maybe Richard can help clarify how we're thinking about it.

But the investment we've highlighted this year is roughly $20 million in terms of sales and marketing, year-on-year, and we were ramping that and getting that in position as we headed into this year.

So, that is starting to bear fruit.

I think we are feeling good.

We know the business well.

We understand the returns and we feel very good about the investments we are making.

Yes.

And look, any time you up your sales and marketing in annuity business like this, you see the expense early and you see the results.

It's a little bit like watching bookings build up.

In our case, we watch boxes or storage revenue build, but the real value comes off the compounding effect of it.

So, it's a multi-year, present value kind of analysis -- because you are building an annuity.

So, any time you up your cost it takes a while for you to get the return back, but the returns are actually quite good.

In terms of, is there upside from here, a little early for me to tell.

There is a theme here, so I'll just to be clear to make sure everybody hears it.

We feel good about our numbers, we feel better about the trends than we have in a long time, but we are not jumping up and down and screaming, yes, this thing's going through the roof.

By the way, it never has.

Welcome to the world of our big (inaudible) annuity.

They are hard to speed up and they are hard to slow down, but the good news is they just keep on rolling.

And this one is speeding up just a little bit, and it is rolling, but it takes a while for this to show.

There's no inflection points here, no great things are going to take off.

That makes sense.

I guess I just wanted to follow up a little bit on an earlier question on the service levels.

How of much of, maybe, the slower levels of growth that we are seeing are just based on tough comps from higher destruction levels last year?

A piece of that -- but if you take it apart by activity class we are still seeing weakness in a lot of the core activity elements.

I see.

And, just thoughts?

Do you think this is a quarter lumpiness issue or are people really changing the way they utilize documents once they are stored?

I believe it's two things.

I think there's a pattern of behavior change, and I still believe that until we see employment get back up strong and then a lag behind that.

Remember, we tend to deal in records that are at least a year old on average.

Okay?

And so, you've got to get people back to work, they have got to generate more records, they have got to build up, they have got to get in the way, and then they have to send them to us before they can ask for them.

And the most active records are the newest records.

So, we've been through a period of people sending us a lot less, so our average age of our storage portfolio has risen which will, in itself, drive down the activity.

We're seeing that.

As the average age comes down, in other words, the storage picks back up, as the economy picks up we've got this great lag effect.

I think some of that will come back, they will pick up some activity.

Underlying that, though, there is also some shift in how people use it.

It's hard to parse the difference right now.

Very helpful.

Thank you very much.

(Operator Instructions)

Our next question comes from Eric Boyer of Wells Fargo.

Hi, thanks.

I was just wondering if you could comment on how customers may have reacted or are reacting to the new strategic plan and the direction you are possibly going with the digital business?

So far -- it's a big customer base, so I haven't had my phone, thank goodness, ringing off the hook screaming at me or anything like that.

We posted and sent out to customers an open letter from me to them just recently explaining what we are doing and so forth.

And, I think the early reaction is, thank you for telling us.

We appreciate being in the know.

And look what we are telling them and, in fact it's the case, we are making sure we focus heavily on our physical business.

That we don't lose sight of the services that you expect of us and we will continue to build that business, we are not draining it.

And part of what we have to explain, and the tough thing we have to explain to employees is, we have got enough capital to give our shareholders $2.2 billion, how come I won't give you a $0.50 an hour raise?

And if you don't think that's a hard discussion, you come try it awhile.

It's the same sort of thing with customers.

You're giving your shareholders $2.2 billion, why do you want to raise my price?

And, you have to get back to economics and market value and cost -- there's a lot you have to do and you have to train your organization to understand and talk that.

And that's the kind of stuff we're working on.

So, in that context, have you changed your strategy or are thinking about changing the strategy with the pricing program?

No.

Look, our pricing program has been and, as far as I'm around, will be designed around A, being fair and B, recovering the true increase of cost minus some productivity we've gained.

I've always believed -- If you go back and peel this industry apart and Iron Mountain apart, we have driven an enormous amount of productivity in our industry, both through the consolidation and creating more just general economic productivity by consolidating competitors.

But we've also brought technology -- how you store a box.

We changed radically the whole technology of how you store a box, what the cost of doing that is and everything, which took a lot of time, money and investment to do it.

Net of that is, we drove unit storage prices down for about 15 years straight on average to the customer base.

And, we have rung the productivity out of this business from their perspective, and now it's time to take back gains related to true increase of cost.

And we'll continue doing that.

And then, Brian, only just (inaudible) margin, would that be up slightly year-over-year with your new guidance, if you backed out the proxy related cost?

I just want to make sure I'm thinking of that right.

It is down slightly because of the -- it's not all that different than what we had talked about heading into the year.

We have this significant $30 million plus of -- last year we had very low incentive compensation payments and we have normal payments this year.

So, that is constraining us, so it's down slightly ex the proxy contest cost.

But it's all driven by that factor, which is really something that you basically supported last year's margins, the underlying operating performance we're seeing improved margins.

Okay, great.

And then, Richard, on the last call you talked about other capital structure ideas that you may be thinking of other than a REIT.

Could you give us a sense of what those could be?

A little early.

I'm still collecting a list.

I have my list.

But since I put it out there, the phones have been ringing, ideas are coming in.

So, let me sort through them a little bit.

Because some of them are interesting, some of them are harebrained, and I'm speaking of some of mine when I say that.

And some might be doable and some may not be doable.

After we get a little homework done, we'll talk to you about it.

Okay.

Fair enough.

Thanks a lot.

Thank you.

Our next question comes from Nate Brockman of William Blair Company.

I just wanted to ask a little bit of a question.

I know, Richard, you have a lot on your plate in terms of different directions, but one of the things of the last couple years you guys have done a great job at is various efficiency programs.

And was wondering if, as you are coming back to the business, if you have identified any other things you wanted to tackle on that efficiency or productivity front in terms of cost reduction?

I didn't identify it, no.

The team's been working on this for some time and I guess you put in three categories.

We talk about the North American play book as if it's a simple little thing that we hand around to each other.

But North America has developed over the last four years, significant numbers of strategies and implemented them very successfully in driving efficiency in the business.

And it's that we are exporting, particularly to our bigger businesses in Europe and starting in the UK which is where we are looking to get 200 basis points this year.

We are also starting a program here we call Support Excellence.

It uses some of the same techniques that we found successful in others.

Targeting two things, benchmark all of our support functions against best practices, and then try to figure out how we can get ourselves to a best practice both service level and transactional cost level.

I stress this to everybody, it's a combination of making sure we serve ourselves well, serve one another well, as well as a combination of doing it at the lowest possible cost.

And I happen to believe you can achieve both of those.

Better service doesn't always mean better cost effect.

Doing it right, doing it well usually delivers better service and at lower cost.

So, we have undertaken those initiatives which will play out over the next few years.

And all of that is embedded in our, in the plan we put forth last year.

So, I don't think I'm going to come up with any secret sauce on top of that, in fact, I would tell you, the plans when I look at them, are awfully aggressive.

And some people have asked me, do I worry about them, and the answer is yes.

But my worry is that we really put forth a pretty hard stake in the ground over a fairly short time period.

I don't really worry about hitting the number, I worry about hitting the number in the timeframe that we put forth we'll do.

But, you know, you take a shot and you do your best to get there, and you got a better chance of getting there if you take an aggressive shot.

And we're taking aggressive shots.

Fair enough.

Thank you.

And then, also there has been a lot of focus, obviously, on the underperforming businesses and services, et cetera.

But certainly the core business is showing some sign of life, I think, is pretty positive going forward and hopefully starting an improving trend.

Just wondering if you could you elaborate a little bit in terms of what you are seeing there in terms of the various end market demand and what is driving that, and if there's any areas that really stand out to you?

Candidly, been here two weeks and 90% of the time I've been talking and dealing with shareholder issues.

I can't tell you I've gotten personally deep enough in to give you a really good answer on the subtleties of the trends.

My time has been focused on the things you have heard about and heard me talk a lot about.

Come late in the day, and starting on Monday I have got a whole series of meetings with different managers of different groups of the business, where I'm going to go get my head back and calibrate my gut again.

After I have done that I might could answer that question better.

Fair enough.

Thanks for the time and welcome back.

Thank you.

Our next question comes from Scott Schneeberger of Oppenheimer.

Thanks, good morning.

Just one from me.

Richard, I heard your response to that last question so, more conceptually I guess is the way I will ask this.

Certainly we've thought about special projects in the services area as kind of a lead or something we would watch to see things come back.

Have you had any conversations with your people out on the street as to what they are seeing and hearing, is that picking up?

And then, the second part of the question is do you believe that's the way you'll see the recovery in the business?

No.

I think we will see the recovery in the business exactly where I think but do not absolutely know we are at the brink of, and that is storage leads, everything else follows.

Think about what I said earlier.

You know, newest boxes create the most activity.

Okay?

So, you've got to build up your newest boxes if you're going to have the activity come back.

With activity comes transportation -- the more you pick, the more you move.

All those things come in that direction.

In terms of special projects, a lot of the special projects are designed around either events, as in people get sued or they have big internal audits and so forth, or they are driven around other events, as in M&A.

A reasonable amount of our special project works moves with M&A as customers take two businesses, put them together, and they have to clean out the records, and sometimes they even have to split the records of buyers and sellers -- selling a division or this, that and the other.

So, they are kind of event-oriented and we don't control those events and so forth.

And then they have a third element, which is, I've got budget money and I want to improve my program and I've been dying to do something to clean up a past mess.

And, I've got to have budget money to do that.

In lean years, that budget money just doesn't show up at our customers.

As years, things get better at our customers, they will reinvest back in their programs.

And oftentimes you will see that late in the year, by the way, for obvious reasons.

So, Q1 is not usually good special projects.

So, that's sort of the trend, that's sort of the buying pattern, and I think we will see it, but we will see it a little later in the cycle.

The other things we see, is our eDiscovery business, as we said, is off.

And that flows through our comp services and project side of our business.

But the bookings are back up, and I think that is as much of a factor of us losing focus on it in our digital business nine months ago, as it is anything.

And really getting focus back on it and doing a really good job which, if we were to own it, nine months from now or six months from now, we would see revenue flow through well there.

And, the last thing I'd say is our DMS, part of our hybrid business, is solid and growing really well, which flows through some of that.

So, you get puts and takes across the board now in a lot of those categories.

Thanks very much.

And by the way, the DMS business, the reason it's growing well, it is primarily driven to help customers on the productivity side.

It's customers looking to use the information in different ways to create more productivity and that's really the trend we sell into there.

Thank you.

(Operator Instructions)

Our next question comes from Kevin McVeigh of Macquarie.

What percentage of the business is hybrid now?

And just, more conceptually, do you think some of those services are sapping some of the revenue from the traditional services side of the business, or is it they don't cannibalize each other?

Yes.

It's about 5%, and in terms of cannibalization, there's two ways to answer that.

In terms of cannibalizing storage, no.

Not in any significant manner and, in fact, I could make the argument that you will actually get more hard copy storage by doing more of it.

Part of the simple argument is that every time you go look at a small vendor in that space, they will all have a warehouse full of boxes that they just seemed to accumulate.

Because customers digitized things for good reason, for productivity, for process reasons, but for archival reasons, digitizing them is a bad idea, because the cost of transferring that data multiple times over 15 years costs way more than just keeping the box for 15 years, and that's what they tend to do.

So, it's not a cannibalization issue.

From our perspective, early on as we got the business going a couple years ago, it cannibalized our box storage business because we really waived the shiny object of a new service in front of our sales force, and made it too easy for them to sell that new service and make their targets and make their compensation.

And they didn't have to work as hard on selling the box storage, and to some extent we did that ourselves and we have clearly recovered from doing that.

And we have clearly gotten better at balancing how we sell, so we can sell them both.

And that's the results you are seeing now.

But we went through the learning curve of that and it was painful.

Super.

And then, just obviously with the way fuel has gone, it seems like you will benefit from the surcharges.

We start to see that on the service line if I remember that?

Is that right?

Yes.

You will see some benefit pulling through on the core service revenues, Kevin.

Just want to highlight, it won't have an impact on profit.

Right?

It will be offsetting higher fuel cost.

So, it's not --

We are seeing the costs on there, and we will see revenue later, but there will also be the cost there later, too.

Super.

And just the last question, Brian.

You tweaked the CapEx a little bit, or Richard?

Yes.

About $5 million of that was just an updated real estate estimate and $5 million was just obviously refining just how we're looking at the year.

So, combined, that was the adjustment.

Great.

Thank you.

So, it looks like we've hit the end of our hour.

I appreciate you all coming and your questions today.

As I said in the beginning, we have got a great business.

It is performing well.

That's a great welcome back for me.

I'm glad I didn't have to come and explain a tough quarter first time out.

As I told somebody who asked me how I like being back, and I said, well, I'm still in a honeymoon period right now, but it won't last forever, but I'll enjoy it while I can.

I appreciate all your support and your cards and letters, and your input.

It is useful to us, it's helpful to us.

We do listen to it, and we try to factor it into our thinking as we have to make trade-offs and decisions as we go forward.

I'll also -- don't know exactly what the schedule is, but we will be out on the road some in cities near you over the next six to nine months and I would love to get a chance to get reacquainted.

For some I have not seen in a while, and those that I really don't know, I would also like the chance to talk to you.

And the last invitation is, you are always welcome to come see us in Boston, so just give us a call and we will try to find a date and time that works.

Again, thank you very much and look forward to seeing you down the road.

Bye bye.

Thank you.

This concludes today's conference call.

You may now disconnect.