Iron Mountain Incorporated (IRM)

IRM 
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Industry: Consumer Services
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Iron Mountain (IRM)

Q3 2010 Earnings Call

October 28, 2010 8:30 am ET

Executives

Brian McKeon - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Robert Brennan - Chief Executive Officer, President and Director

Stephen Golden - Vice President of Investor Relations

Analysts

Andrew Steinerman - JP Morgan Chase & Co

Vance Edelson - Morgan Stanley

David Gold - Sidoti & Company, LLC

Scott Schneeberger - Oppenheimer & Co. Inc.

John Mirshekari

Gary Bisbee - Barclays Capital

Kevin McVeigh - Macquarie Research

Presentation

Operator

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 Third Quarter 2010 Earnings Call Webcast. [Operator Instructions] I would now like to turn the call over to Stephen Golden, Vice President of Investor Relations. Mr. Golden, you may begin your conference, sir.

Stephen Golden

Thank you, and welcome, everyone, to our 2010 third quarter earnings conference call. After my announcements this morning, Brian McKeon will review our financial results, followed by Bob Brennan's CEO remarks. When Bob is finished with his comments, we'll open up the phones for Q&A.

I would like to take this opportunity to thank everyone who attended our 13th Annual Investor Day in New York earlier this month. We are pleased with the turnout, and hope you found the presentations informative. As always, we appreciate your support.

For 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 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 or 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 differ materially from those contemplated in our forward-looking statements.

As you know, we use several non-GAAP measures when presenting our financial results. Adjusted OIBDA, adjusted EPS and free cash flow before discretionary 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 reconciliation of these non-GAAP measures to their 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 our CFO, Brian McKeon.

Brian McKeon

Thanks, Stephen, and good morning, everyone. Slide 3 highlights the key messages from today's review. We continue to drive strong financial performance in the third quarter. Reported revenue growth for the quarter of 2% was in line with our outlook. Results were supported by solid gains in our International Physical segment, strong growth in hybrid services and benefits from higher recycled paper prices.

Revenue growth continues to be constrained by economic factors, which contributed to very soft core service activity this summer. Adjusted OIBDA came in above the high end of our guidance range, driven by continued benefits from productivity initiatives and lower incentive compensation accruals. Adjusted OIBDA increased 13% in Q3 and 11% year-to-date versus the prior year. Adjustments to incentive compensation accruals added about five points of growth in Q3 and four points of growth on a year-to-date basis.

Adjusted EPS for the quarter was $0.35 per share, an increase of 39% compared to the same period last year. Our reported EPS was a loss of $0.76 per share, including a $1.24 per share after-tax charge for the Digital goodwill impairment.

As we proactively advance changes to improve performance in our Digital business, we evaluated our Digital business carrying value, resulting in a $255 million estimated goodwill impairment charge. We'll finalize the amount in the fourth quarter and record any adjustment if necessary at that time. It's important to note that this charge does not impact revenue, adjusted OIBDA, adjusted EPS or free cash flow. Both Bob and I will discuss this more fully later in our remarks.

Also included in reported EPS were benefits for the impacts on Other Income and our effective tax rate related to the weakening of the U.S. dollar within the quarter and the gain on the sale of our domain name management product line.

For the full year, we're raising our adjusted OIBDA outlook reflecting the strong year-to-date performance and benefits from lower incentive compensation accruals. We're also raising our full year cash flow outlook to reflect lower capital spending projections and expected benefits from recently enacted U.S. tax legislation. We're refining our revenue outlook as well to incorporate current internal growth trends and foreign currency exchange rates.

Let's now turn to Slide 4 and begin our review of the third quarter results. Slide 4 compares our results for this quarter to the third quarter of 2009. Q3 was another solid quarter of financial performance. Enterprise revenue growth was 2%, in line with our outlook with overall gains constrained by continued softness in core service activity. Continued strong profit performance was supported gross margin gains and benefits from lower incentive compensation accruals. From a segment perspective, North American Physical posted 2% internal growth supported by strong complementary service revenue performance, including benefits from higher paper pricing and hybrid service revenues.

Storage internal growth was 1% in Q3. North American records management volume growth moderated as continued higher outgoing volumes offset new sales gains. As expected, there was some moderation in average net price gains, which are now trending in the 2% range for Records Management, due in part to lower CPI levels. Episodic destructions in our Physical Data Protection business constrained growth in that service line and also contributed to lower storage revenue growth. Core service revenues declined this summer, consistent with overall soft economic conditions.

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