May 1, 2008
Executives
Stephen P. Golden - VP, IR C.
Richard Reese - Chairman and CEO Brian P. McKeon - EVP, CFO
Analysts
Vance Edelson - Morgan Stanley Andrew Steinerman - Bear Stearns David Gold - Sidoti Michel Morin - Merrill Lynch Scott Schneeberger - Oppenheimer Franco Turrinelli - William Blair Edward Atorino - Benchmark Andrea Hirth - Robert Baird
Operator
Good morning, my name is Tina and I will be your conference operator today. At this time, I'd like to welcome everyone to the Iron Mountain Q1 2008 Earnings Webcast Conference Call.
All lines have been placed on mute to prevent any backgrounds noise. After the speakers’ remarks, there will be a question-and-answer session.
[Operator Instruction] Mr. Golden, you may begin your conference.
Stephen P. Golden - Vice President, Investor Relations
Thank you and welcome everyone to our 2008 first quarter earnings conference call. After my announcements this morning, Richard Reese will give his state of the company remarks, followed by Brian McKeon, who will deliver the financial review.
When Brian is finished, we will open up the phones for Q&A. 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 two, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2008 financial performance. All forward-looking statements are subject to risks and uncertainties.
Please refer to today's press release or the Safe Harbor language on this slide for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements. As you know, operating income before D&A are OIBDA and free cash flow before acquisitions and investments are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.
We provide additional information and a 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 in today's press release. Before I turn the call over to Richard, I would like to let you know that our 2007 Annual Report will be available on our website later today.
I encourage you all to visit the site and take a look at the report. It's a great report, and hopefully you will find it useful.
With that, I would like to introduce Richard Reese, our Chairman and CEO.
C. Richard Reese - Chairman and Chief Executive Officer
Thank you Steve and good morning everybody and welcome to this Q1 call. As you saw from our announcement today, our business is performing well and we're really on track for delivering against our annual financial goals.
The strategy continues to match not just the financial performance, we are showing solid growth throughout our business and efficiency gains, which according to our strategy we are using to fund our new service expansion and expansion of our global footprint. So, basically as I have said many times, it has been business as usual and this was a good quarter, business as usual quarter for us.
So, let’s talk a little bit about it. It was a good start for the year and gives us the confidence that we will have a year as we have forecast.
But, as you know, most of the time we are able to bring our years in on an annual basis and again we expect to do it this year. We saw solid gains across most of… or all of our business segments and there was modest acquisition activity slower than last year, as we expected.
We've told you before that last year was sort of an unusual high year for recent history, and we expect this year to be back down and in fact it is back down as we told you it would be. Good revenue growth of 18% and solid internal revenue of 9%.
The quarter benefited from the acquisition activity that was strong last year and most of the deals closed after the end of first quarter. So, you will see that year-to-year comparison coming off a little bit as the year goes through.
Also strong benefits from FX. FX added 3% to the total revenue growth, about a third of our revenue now is outside of the United States or outside the US dollar.
And of course our reported benefits... our reported results have benefited from the weakening dollar.
I should remind you of course that one day… in some part in the future, if the dollar turns around, we will see the other side of that curve. But, right now, it's on the positive side for us on a reported basis.
Solid storage growth, remained in the ranges we predicted and remain good at 8%. Storage represents about 54% of our total revenues and it was up for the 77th consecutive quarter.
But, as you know, those who have followed our business long-time, storage is really the driver, it's off of the storage which we drive all other services and our relationships that we create through storage are what we are using as the basis of our expansion of our new services strategy. So, we saw that storage growth.
Good performance, both in our physical businesses, as well as our digital business. It is a large flywheel.
It is what keeps the business rolling regardless good times and bad times. Over the years, I have talked a lot about the large number and how hard it is to keep growing something this big.
We seem to find ways to do it and that's something partly because of good execution of our organization and sales force, and partly because we operate in a real favorable market, which information continues to grow and we continue to benefit through that. Service was also good, at 10% internal growth, 23% overall, that represents the other 46% of our revenue.
We saw some moderation in what we term core service, growth for the quarter, that was primarily related to our destructions, which slowed a bit from Q1. We have seen some acceleration on the destruction activity, where customers were restoring old information in the second half of last year, and we saw that acceleration come off some in Q1.
It does historically tend to go on those sort of patterns, unfortunately, and they are not predictable what the patterns are precisely as customers make decisions to clean up programs, sometimes you have seen acceleration and then it comes back to normal, and we've seen that pattern and we seam to be setback to a normal patent now we believe. Offsetting, that we saw strong… and we've seen this trend for sometime, our complementary service growth is, as we’ve talked about those, those are kind of our own categories of types of services that really complement our business that is it, they are not directly, in most is, driven off of our storage relationships, but the things we can do for customers.
Of course, we have this relationship, because we have the knowledge, because we have the skill, and we have right proposition they are looking for. We are continuing to invest in those spaces.
We are continuing the see good performance there. This particular quarter, the international businesses did a really good job in that space.
We also benefited for higher recycle paper prices in our shredding business and stronger than forecasted license sales in some of our digital business. So, as I said, all in all, just a good quarter all the way across the board.
Total service revenue growth was up 23% and of course the difference between internal growth and others besides FX was because of acquisitions. The two way acquisitions that really benefited the service sides where RMS and our Stratify acquisitions.
Our strategy has been to invest in services that complement our strong storage relationships and so just to make a comment about that this has been a long theme for us and it is working. It is continuing to drive our growth rate and it does some other things for us.
It also changes the characteristics of the business. So.
I am in little more volatile due to lack of predictability in some of these categories. But, service, as a percentage of revenue, will continue to expand, not quarter in, quarter out, and nothing happens that way in this business.
But, that will be the long-term trend. We are investing and try to make that happen because really what's happing is, we are investing in services that are much lower capital investment required that can benefit from our relationships that we do drive our storages.
You know, storages are high capital service line or product line. It turns around… most of these services have lower margins than our storage.
So, you get the overall margin mix impact, but net-net, it drives and helps increase return on investing capital, as well as deepens the relationships with our customers, which are all good things as far as we are concerned. So, net-net, we feel good about the business.
We remain solid and stable. On the top-line, regardless of the economy, we seem to do pretty well right now.
So, we are feeling good. On the OIBDA basis, OIBDA growth $0.14% in the quarter, excluding some one-time losses of about $3.5 million for prior quarters, on a comparison basis.
We saw good upside coming from OIBDA, both flow-through revenue performance, good profit flow-through. Although the OIBDA was constrained a bit by higher SG&A than in past, these were expected.
So, it is not something we didn't expect and something we basically had forecasted and Brian will get in all the great details on this. But, a big part of how the SG&A really is the...
is starting to fold in the acquisitions, particularly the digital services acquisition of Stratify, Accutrac and things like that come with higher... they come with different financial characteristics.
Typically, they come with higher gross margins, but also much higher SG&A side. And we are starting to see some of that shift as we integrate those kinds of acquisitions.
We also launched some new digital services, particularly our Digital Record Center for Medical Images, which is designed to store online medical images such as MRIs, CAT Scans, and so forth. It's one of the largest growth segments of digital data on the planet in partnership with Hewlett-Packard, HP Technology and then a combined sales effort, we found a market with them and we did start across some of that during the quarter.
All this are good things that we are doing in the acquisition space, as well as in the new services startup. But, as I said, changes to mix a little bit and it causes some initial investment as we put it all together.
We also initiated investments late last year and some of that flowed through into Q1. We spoke about that though Q4, in the call for Q4, related to increased investments in some of our systems and processes to strengthen chain of custody and security of customer assets, and of course we are continuing to build out sales resources in our continental market...
continental Europe markets and other international markets. It's a trend we went through on a big way in North America, as some might remember, we accelerated investments to sales as we learnt how to do it and we saw the benefit of that overtime and we are learning in our international markets how to get better and better at that.
These are good markets and they growing at strong double-digits for us. So, we are investing more in increasing the growth and going for market share over there.
We do expect some of these cost impacts, and Brian, as I said, will get into detail, will moderate later in the year on a comparison basis. The key message here, which you'll hear over and over from us, is we are not managing the business quarter-to-quarter, it was a good quarter, but we are focused on delivering the annual goals.
A good start always helps you feel better, by doing that... I understand there are skeptics out there.
People always have to have something to worry about, but look at this as a long trend. The business is doing fine.
As I said, we are feeling good about it. On the acquisition front, I did say it was modest, and it was modest.
There was a nice shredding business in New Zealand, fitting our strategy of taking many of our core services and expanding our global reach with it. We learnt how to do something and where there is a good market opportunity and there is a good return, we are going after it and shredding is one of those...
not in all markets, there are not good opportunities in all markets, at least not yet. But, there are good markets in that we are not in, and we will continue to expand there.
We’ve made a small hard copy fold-in in Oklahoma, so that was just about putting two small businesses together and driving for scale. And those are the kinds of things we are focused on doing in our acquisition strategy in certain parts of the world.
After the end of the quarter, we bought out a minority interest partner in Brazil and this was a successful round trip. We had a partner since 2001.
With that partner and working together, we’ve built a very nice business in Brazil, over 1,000 employees in four markets. And Brazil is one of the real large… if you look at long-term, most people will tell you that growth over the long haul, and you can look at India, China, Russia, and Brazil, and if you notice carefully in the last 24 months, we have gone to India, China, Russia and we've been investing in Brazil and there is a reason for that, because we are looking to the long-term.
Just like we don't run the business quarter-to-quarter, we can do it, we don’t always run it year-to-year. We are thinking about what this business will look like in ten years and periods after that.
We also acquired a small amount minority interest, 15% in a Swiss business. That has been a market… that’s one of these places in Europe that we have had trouble finding a good entry point.
We think we have found a good end point now. So, we can start to… frankly start to serve pan-European customers in a different way and some of our global customers in a different way.
The other thing I want to talk briefly about was the Stratify acquisition. We closed that in December 2007.
So, we've had a little time now on it to understand what we have gotten so forth. It was our third largest digital acquisitions… it's our third digital acquisition and our largest digital acquisition.
As I said, we acquired in 2007 and the integration process is proceeding as we planed. Their Q1 results were excellent and ahead of our expectations.
So, they are off to a good start. In fact, I just spent three...
two and a half days in their offices in California last week and just spending time with the team and other people just to get really deep under the hood. I want to leave it alone for a while and let them get a good quarter and which they did.
So, I started bugging them, because not only have a good business, we have got a tremendous organization. It is tremendous technologies and skills on the shelf that when I first took a hard look at him I had a good instinct that that was there and I went deep to make sure and the answer is, it was So, I am feeling more excited than ever about.
The long-term, and I stress that word long-term potential of what we can make out of that. This is going to be a case of one and one equals four, not even three in my opinion.
But, don't anybody rush out and buy the stock, because I said Stratify was wonderful, that will be a very stupid thing to do in the short run, maybe not in the long run. Last thing, I want to talk about is because we had such technical difficulties on our last call, if some did listened the phones, I won't get into the details, but it was a mess and we believe we got ourselves repaired, at least we got certainly a DR plan this time that will work, if we have problems.
But as I did announce last time that I had informed the Board and we had... the Board had decided that the right thing to do, according to our succession plan that we have been working on for sometime.
It was time to me to change my role and to go the role of an Executive Chairman and to elevate Bob Brennan to the role of Chief Executive Officer. So, we are still on path and expect to do that at the Board meeting after annual shareholders meeting, where we all are standing for reelection and of course Bob is standing for the first time for election to the Board of Directors.
Just to stress what my role will be as Executive Chairman, I chose carefully the title Chairman as I’ve told some of the employees, when I dropped the word Executive that means I might go learn to play golf, which would be a field exercise anyway. The reason I chose the term Executive Chairman is the implication that… is that I'm still working full time because that is what I am doing and expect to do and expect to continue doing so long as I am being useful and people want me to continue doing it.
It was with right time and place I think in the company's history and from me personally to change my focus. I want to focus on… if you look at my legacy and I am not going talk a long time about my legacy, because I believe in a lot of those stuff.
But, if you look back, it's pretty simple. I led the team that accumulated this company from… I started at $3 million and we are going to do over $3 billion this year.
But, just take since we have been public, from about $100 million in revenue and over $3 billion. We have accumulated from being a single product line, single country, 20, 25 city operation to 38 countries and a broad product line across the physical and digital universe.
I'm proud of what the organization has done and each of those businesses are doing fine. They are good businesses.
The real upside, if you want to look it... and I keep citing Bob a little bit is to what his legacy will have to be.
But, if you want to look to the future the real upside is making one and one equal four out of these businesses and the opportunity absolutely is there do that. So, we are not going to be opportunity bound, we are going to be execution bound and it's hard stuff, because the problems that we face may sound simple from the outside, but if you go talk to customers they are just scratching their heads of how to do it in a cost-effective manner and we understand how to do it.
There are complex problems and right now most of the solutions out there are complex and expensive and our goal is to create a series of simple solutions to solve… all together to solve a complex problem. I'm going to put a lot of my time and energy in doing that, because I think that's where the greatest value enhancement I can have to helping our shareholders and helping our employees and the business.
That's a better leverage on me than running business over the next time period. So, that's what I'm going to be spending most of my time doing of course, I'll remain a close advisor to Bob and as Chairman of the Board… member of the Board and operate at those levels too.
It has been a good time for me and I'm not leaving. So, I am not going to give my swansong speech, if you ever hear it, it won't be today.
Before I turn over to Brian, a brief summary, and one other thing I do want to use my license, this is my, I think, 49th conference call and not my last. But, it is probably my last one in which I'll lead it, which I’ll do most of the talking.
But, from time-to-time, I've been known to lecture the market, so if you bare with me a little bit, I'll give you just a slight lecture. And I do it in your best interest, not necessary, in our best interest.
The business is running well. It was running well last quarter and the quarter before that.
The stock popped up and popped down, crazy volatility. It's not a volatile business.
So, it probably tells me people didn't believe us. It's the only thing I can figure out.
The business will vary quarter-to-quarter and I've read some headlines from Analyst Day and I appreciate the positive headlines, don't get me wrong, they are always better than negative headlines. You are talking about this being an inflection point.
I just want you understand we don't run the business that way, we are running the business to meet our annual goals. We have given you the numbers.
We are going to hit those numbers. There are no guarantees in life, but we are going to manage...
we are going to do our best to manage the business to hit those numbers. We don't manage the business except for people's internal incentive plans and a lot of other reasons to hit specific quarterly numbers and we make judgments oftentimes and they go against specific quarterly numbers.
But, go in the best interest of the annual numbers and the best interest, quite candidly, we make some that go against them in the best interest of the long-term of the business. And we are going to keep doing that and we will communicate those things as it is going.
But, I just want to be careful that people don't grab a hold… this is a good quarter and I know people didn’t like the last quarter. I am telling you there are no differences, but regardless of that, I want to be careful that people don't grab it and draw a ruler or push a button on your spreadsheet and drive us straight to the roof.
We think the business is going to do well and watch out. I personally believe it's going to be very tough economic environment.
But, our business is changing and that makes it a little more… little different than past. Our new digital services, the service mix puts a slightly more volatility in it, puts a slight more pattern shift than in the past.
Some of our businesses are weak in one quarter others are strong in different quarters. Those mixes are changing and so forth.
But, net-net is, we are running the business for annual performance. We are of to a good start.
We expect to do what we say we are going to do for the year. And it's still a very clear picture and I still love it.
And we’ll look forward to taking your questions. Brian?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
Thanks, Richard. And good morning everybody.
Q1 was a solid start to the year for Iron Mountain. We posted strong revenue and OIBDA gains with early year results ahead of our forecast.
This reflects solid underlying business performance including better than expected results in certain aspects of our digital business combined with continued positive impacts from foreign exchange changes and high paper prices. We will begin today with the review of our Q1 results.
I will also review our cash flow performance, capital spending trends and debt position through the first quarter and put these results in a context of our full year outlook. We will conclude with an update of our 2008 full-year guidance, which we've refined reflecting our solid early results.
We will also share our outlook for the second quarter. Slide 4 highlights the key messages from today's review.
Iron Mountain delivered strong financial results in Q1, with revenue up 18% and comparable OIBDA up 14%. We posted high revenue gains across all major business units, supported by 9% internal growth, the benefits of our major acquisitions, and favorable foreign currency movements.
We also drove strong OIBDA growth in the quarter despite some dilutive impact from acquisitions completed last year and some carryover impacts from investments initiated in 2007. On a reported basis, OIBDA increased 12%.
Included in OIBDA are net losses on asset write-downs of $3.5 million and $37,000 for Q1 2008 and Q1 2007 respectively. When excluding these losses from both years, comparable OIBDA grew 14%.
As a result of our Q1 performance, we are refining our outlook for the full-year, raising the low end of our revenue and OIBDA forecast ranges. This reflects our confidence that we're on track towards achieving our full-year financial goals.
Let’s move on to looking at the details on our performance on slide 5. Slide 5 compares results for this quarter to Q1 of 2007.
Overall, we had another strong revenue quarter supported by a balanced growth across our key business units, which drove the overall increase of 18%. Our largest segment, North America Physical posted 13% growth overall.
Internal revenue growth was 7%. We saw solid growth in our secure shredding business, with continued strength in recycled paper prices, which offset some softness in core service activity.
Overall, growth continues to benefit from the ArchivesOne and RMS acquisitions. Our international Physical business was up 28% overall.
Internal growth was 12%, driven by strength in Latin America and Asia-Pacific and solid performance in Europe. We continued to see strong gains from complementary service growth across our international business.
International growth also benefited from selected acquisitions that are strengthening our global footprint and from favorable foreign exchange changes, which together added 16% to revenue gains. Finally, our digital segment drove better than expected revenue gains, supported by consistent growth in storage revenue and better than expected performance from our Stratify acquisition.
Software license sales were also higher than expected, although still below the strong 2007 levels. Revenue gains helped drive a solid 19% year-on-year improvement in gross profit.
Gross margins were up modestly for the quarter, compared to the same prior year period, supported by higher recycled paper prices. Growth in our digital service businesses, which have higher gross margins, also had a positive impact.
These gains were partially offset by impacts from higher energy costs and business mix. SG&A growth was 23% in the quarter, compared to prior year levels.
Higher rates of overhead growth were impacted by two primary factors. The first involves the integration of our recent technology acquisitions, including Stratify, which have a relatively higher overhead cost base as a percentage of revenues.
Q1 SG&A growth also reflects carryover impacts from investments in security, international sales resources, and infrastructure initiated in 2007, as well as additional stock option expense related to higher than normal grant activity last year. The impact to these factors on cost growth will moderate later this year particularly in the fourth quarter, where we have more favorable comparisons.
OIBDA was $176 million for the quarter, up 12%. As noted including OIBDA for Q1 2008 where net losses on the write-down of assets of $3.5 million.
Loss on the building we spoke up on our last call was slightly less than the $3 million we forecasted, but we did have some assets write-down associated with the upgrade of our core inventory system. Adjusting for these losses, OIBDA growth was 14% and OIBDA margin was approximately 24% in Q1.
Depreciation was $61 million and amortization was $8 million in the first quarter, as expected. Operating income was a $106 million for Q1 2008, up 7% versus the prior year as OIBDA gains were partially offset by increased depreciation and amortization driven by 2007 capital spending and acquisitions.
Slide 6, breaks down our overall revenue growth. It shows internal growth by major service line, as well as the impact of acquisitions and foreign exchange, which added about 7% and 3% respectively to our growth ranges for the first quarter.
Internal revenue growth for the quarter was 9% in range of our full year growths. Internal growth was comprised of 8% storage growth and 10% service growth, reflecting continued benefits from expansion of less capital intensive more project based offerings.
Core service growth moderated in Q1, impacted by a slow down in destruction revenues following strong growth in this front in Q3, Q4 of last year. Offsetting these effects was continued strong internal growth in complimentary services.
We saw a solid project growth in international markets in Q1 and software license sales ran ahead of forecast. Growth of recycled paper revenues across geographies remained strong supported by continued higher recycled paper pricing.
Keep in mind that complimentary service revenue, which represents about 15% of our overall revenues, can fluctuate over time, given changes in demand and timing for special project activity and variations and factors such as recycled paper pricing. As noted in our last call, we do expect growth in complimentary services to moderate as we work through this year due to the comparisons to some large European public sector projects that are either completed are winding down.
Despite these anticipated impacts, we expect that our overall internal growth rates will remain solid through the year, we believe we are on track to deliver against our full year internal growth goals. Moving on with our review of Q1 P&L performance.
Slide 7 bridges our Q1 operating income to net income and EPS results. Q1 results on these fronts were basically as expected.
As discussed, operating income for the quarter was up 7% to a $106 million, as OIBDA gains were partially offset by year-on-year increases in depreciation and amortization. D&A grew 12 million versus prior levels in Q1 reflecting increased CapEx spending and the impacts of our 2007 acquisitions, most notably ArchivesOne and Stratify, which were completed after the end of Q1, 2007.
Our Q1 interest expense increased compared to Q1 2007 as expected driven primarily by increase debt for our 2007 acquisitions. Other income was $6 million or about $0.02 per share in Q1, primarily reflecting gains related to foreign exchange rate fluctuations as we mark our inter-company and third-party debt to market.
In the first quarter of 2007, we reported other income of $8 million or $0.02 of share related primarily to insurance gains. Net income and EPS were $33 million and $0.16 per diluted share respectively, down moderately from 2007 levels, due primarily to lower operating profit, as I have discussed, including the $3.5 million of losses on asset write-downs and lower other income in the quarter.
In Q1, our effective tax rate was 34.9%, slightly below the 36% tax rate we forecasted on our last call. The decrease was driven by the net tax impact of foreign currency gains and losses in different tax jurisdictions.
We are now estimating our tax rate before discreet items for 2008 to be approximately 38%. The increase from the 36% we estimated on our last call is due to the tax impact of un-benefited net operating losses at some of our international startup businesses.
After 2008, we expect our tax rate, excluding the impact of discreet items, to decrease over time to approximately 36%. Slide 8 summarizes our capital spending for the quarter, it highlights are year-to-date results compared to the full-year 2007 amounts and our current 2008 outlook, which we're reiterating today.
Our Q1 2008 CapEx was $56 million including $4 million for real estate. Traditionally, the first quarter is the light CapEx quarter as some projects are scheduled for later in the year and many required time to plan and source before the significant expenditures are eventually made.
We are currently spending to our plan and expect to finish the year within the forecasted range. Consistent with our long-term financial goals, we are focused on improving our overall capital efficiency by reducing CapEx spend as a percentage of revenues.
Some of this efficiency is related to business mix as we continue to see strong growth in our new services, which are less capital intensive than our core physical business. The capital efficiency we gain through this mix shift offsets the relatively lower margin characteristics of these services resulting in attractive incremental returns on investment.
Lets now move on to slide 9 and look at free cash flow for the quarter. Slide 9 highlights our year-to-date cash flow performance compared to the same period in 2007.
For Q1 2008, free cash flow was negative $20 million before acquisitions and discretionary investments in real estate. The year-on-year decrease in cash flow reflects the payment in Q1 2008 of been unusually large 2007 year-end CapEx balance of $60 million and a $45 million increase in working capital usage.
The working capital increase was due primarily to increased accounts receivable driven by increased sales as well as the timing of normal payroll and AT cycles, which led to lower accruals and payables. Keep in mind that free cash flow is best looked at on a full-year basis as the timing of certain cash events is not consistent throughout the year.
For example, the first quarter, historically our lowest cash flow quarter, was impacted by the 2007 CapEx accrual and the payment of our annual bonuses. For 2008, we continue to expect free cash flow before acquisitions and discretionary investments in real estate to be approximately $25 million to $75 million.
As noted in our last call, 2008 free cash flow is impacted by the 2007 CapEx accrual I just spoke of being paid in Q1. Now let's turn to slide 10 to review our debt statistics.
In terms of our debt portfolio, we ended Q1 2008 in a position very similar to year-end as you can see on this slide. Our weighted average interest rate is down to 7.1% and we are 75% fixed.
Consolidated leverage decreased to 4.4 times within our target range of 4 to 5 times OIBDA. Maturity is now at 7.1 years, with no meaningful repayment obligations until 2012.
Our liquidity also remains strong. As of March 31, we had more than $450 million of cash availability under our revolving credit facility.
Now let's move ahead to slide 11 to discuss our revised 2008 financial guidance. Turing to slide 12, based on our solid start to the year, we are refining our full year guidance, raising the low end of our target ranges for revenue and OIBDA.
Our full year revenue outlook is now $3.015 billion to $3.080 billion, and we are now targeting full year operating income of $474 million to $499 million. Note that the operating income outlook includes impacts from the slightly higher than excepted losses on assets write-downs recorded in Q1.
This would imply an OIBDA range of $766 million to $791 million for the year or growth of 10% to 14% on a comparable basis, excluding gains and losses on assets write-downs. We are maintaining our full year CapEx forecast of $440 million to $480 million.
At mid-point performance, this would equate to a modest reduction in capitals spending as a percent of sales in 2008 building on our 2007 progress. Our expectations for Q2 performance are shown here as well, which implies revenue growth of 12% to 15% and 8% to 13% comparable OIBDA growth.
We will continue to work through higher levels of cost growth in Q2 similar to Q1 driven by acquisition integration and carryover cost impacts from investments initiated in 2007. As noted, we expect these impacts to moderate later this year consistent with our full-year plans.
So, in summary, we are of to a solid start. We are driving solid growth across our business, and we are confident that we are on track to deliver against our full-year financial objectives.
Thanks and we will now open the phones to take your questions. Question and Answer
Operator
[Operator Instructions] Your first question comes from the line of Vance Edelson with Morgan Stanley.
Vance Edelson - Morgan Stanley
National opportunity, do you see multinational corporations as wanting to consolidate their business globally towards Iron Mountain, or is it more they view on a country by country basis, how should we think about that?
C. Richard Reese - Chairman and Chief Executive Officer
A lot of ways, the answer is, there is no one answer. It depends on the company, industry and a lot of things.
But, there is overall trend of wanting to consolidate... a variety of trends.
One is to have fewer vendors period. Two, is to drive more purchasing leverage through doing that.
The third thing is, as though, for compliance reasons, having fewer vendors makes it cheaper and easier to manage. Consistency at what you do on a global basis is coming more and more important.
Having said that, all of that, you got to earn it locally. There is no...
there are very few companies... there are more and more than it used to be that would make a true globalization, but the more...
the general trend is to make more regional decisions under some consistent umbrella and so that's why we are trying to become strong in each of the major regions.
Vance Edelson - Morgan Stanley
Okay. That's helpful.
Could you elaborate on the destruction variability from quarter-to-quarter? Is that something that's predictable as in there are seasonal factors or is it less predictable and we are not going to really be able to accurately model how that ebbs and flows?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
There is some variation and that is obviously driven… we have some advanced insight into that, but it's…
C. Richard Reese - Chairman and Chief Executive Officer
A lot of it is... there is… like a lot of things, there is lot of complex trends, but by and large, there is base line amount of that activity that sort of happens like clock work.
And then what happens is and it doesn't take many very large customers to either do catch-up, that is, they’ll have to put a lot of stuff on hold, because of their retention programs, and we've seen this trend not very well managed. They are afraid of the litigation and the compliance issues of doing that, then they build a program, oftentimes we help them to do, and then they do a big catch-up, maybe two or three years backwards and it doesn't take...
two or three of them do that in a quarter to make it rise. You also, by the way, sometimes see… I've seen this pattern before and I'm not...
I don't know for fact that we are seeing this yet. But, I have seen this pattern where in tough times people stop destroying because they would rather pay the monthly storage price and just budget here, than the one-time fee to get rid of the box.
They are protecting those...
C. Richard Reese - Chairman and Chief Executive Officer
And possible we may have seen some of that impact in Q1. I think in a full year basis we have a pretty good handle on that, but we again do see some fluctuations quarter-to-quarter.
Vance Edelson - Morgan Stanley
Okay that makes sense. And then just one last question.
Could you comment on increased energy cost and how you are passing that along to customers and whether impacts the business at all?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
The energy costs are about 2% to 3% of our revenues and that's split pretty evenly between basically cost that flow through our facilities... energy for facilities, lighting, etcetera, and the other half is related to transportation.
It is somewhat higher than that in the first quarter because we are… just the seasonality nature of our business. A significant number of our customers, we have fuel surcharge arrangements for the transportation fees, so that's something that we can't pass on.
But, we did see some negative impact in our margins in Q1 that was an offsetting factor that...
C. Richard Reese - Chairman and Chief Executive Officer
In the short run, it's like a lot of businesses. The real variable stuff like and the rolling stock, we've been working over the last 18 months or so to put in our contracts and agreements, fuel surcharges.
We are not a 100% there with all customers, but we are on a path to get there. So, we will have fluctuations and [inaudible] we can deal with it.
But, the other piece coming through heat and light and facilities, you can’t index that so easily that shows up in price increases later. So, in the near term, we eat it and in the long-term, we’d expect to get it back.
Vance Edelson - Morgan Stanley
Okay. That's helpful.
Thanks guys.
Operator
Your next question comes from the line of Andrew Steinerman with Bear Stearns.
Andrew Steinerman - Bear Stearns
Hi, I am going to take debate on Richard's comments that quarter-to-quarter margins could be volatile. Just to kind of have clarity on this.
When we look at the margins in the first quarter excluding the $4 million write-off, it would seem like the first quarter would be the low quarter for the year to make the overall margin goals that are implied in the middle of the guidance. I will also note, as you guys… historically out, that the first quarter of the year is usually the lowest quarter of the year on margin.
So, when Richard called out volatility, did you mean that we could expect unusual volatility or normal volatility?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
You're right on both points in terms of the implications for margins. The first quarter is historically our lowest margin quarter and part of that is driven by the energy cost we just spoke of.
Our guidance would imply that we're going to have better and improving margins as we work through the year, both in terms of quarter-to-quarter and also on a year-on-year basis. There are two drivers to that.
One is, we're expecting moderation in the cost growth later this year, Andrew, I just want to highlight it's probably going to be a bit more in Q4 than it is in Q2 and Q3, but we are expecting some improvement on that front. We are continuing to target improvement in gross margins driven in part by real estate efficiencies.
So, we wouldn't read anything to Richard's comments signaling that we're expecting volatility this year quarter-to-quarter, just trying to highlight that margins do vary on a quarter-to-quarter basis and we are focused on delivering our full-year goals and we are going to manage that way.
Andrew Steinerman - Bear Stearns
That's great. Thank you.
Operator
Your next question comes from the line of David Gold with Sidoti.
David Gold - Sidoti
Hi, good morning.
C. Richard Reese - Chairman and Chief Executive Officer
Hi, Dave.
David Gold - Sidoti
A couple of clarifications or follow-up questions. One the comment… I mean the release, international special project revenue helping in the first quarter.
Are those the same projects that you commented on that you are pointing to in fourth and first quarter that are running off as we speak a little bit?
C. Richard Reese - Chairman and Chief Executive Officer
Our commentary was talking actually about overall international complementary service growth, which includes Latin America and Asia-Pacific, which did quite well on that front in the first quarter. We did see growth in Europe as well and that is continuing to benefit from a project that we're expecting to wind down relatively… I think right after the first half of this year.
We tried to highlight last year that they were two European projects that year-on-year we are going to lose about $25 million in annualized record… $25 million in revenue year-on-year and that is going to be a factor that is going to contribute to moderation. Our expectation, we are going to see lower levels of complementary service growth in the back half.
David Gold - Sidoti
Got you. Okay.
It's helpful. And then one other question, if you can comment or give a little bit more color on paper prices, have been strong year-to-year… if you can just remind us where we were a year ago versus this year?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
In the first quarter of last year, we had paper prices in the range of about $150 per ton and right now we're in the $225 to $230 range and so that… we will start to see the… paper prices really ramped up post Q1 last year and they have kind of moderated in terms of their increases. They're a bit better than we thought they were when we were on our last quality, but we will see less growth than benefit from that if they hold at current levels as we work through the year.
David Gold - Sidoti
Perfect, thanks so much.
Operator
Your next question comes from the line of Michel Morin with Merrill Lynch.
Michel Morin - Merrill Lynch
Yes, good morning. I am Michel Morin at Merrill Lynch.
I think you alluded to some real estate efficiencies that might help the gross margin a little bit later on, are you referring to winding down the real estate rationalization project that’s in Pickferd [ph] or is that all behind us already?
C. Richard Reese - Chairman and Chief Executive Officer
I think we are referring just to broad base. Last year, we went long on some space and that hit our margin and we are absorbing it, we are taking fewer buildings this year for upping our capacity utilization and it’s flow through the year.
You will that from time-to-time that same trend by the way. Some of it's opportunistic, some of it just, when you get the right circumstance, you take it.
But, we work pretty long in a couple areas. The beauty of our business is, if you go long, it's just how fast you take to get utilization up.
We are getting up just fine.
Michel Morin - Merrill Lynch
Okay. And then specific to the Pickferd’s rationalization project, is that behind you now?
C. Richard Reese - Chairman and Chief Executive Officer
We are still working through that in the UK. I know the big pieces, I think are behind us in some of the real-estate.
The other thing we did in Australia is we chose to make that up a central management hub for accounting, consolidation and overhead staff for Asia-Pacific because of the small nature of a lot of the investments we are making there, so that, we added extra cost down there relative to the size of the business. So, that part, we haven't gone through yet, but the real state side, I think, is pretty much behind us.
Michel Morin - Merrill Lynch
Okay, great. That is helpful.
On the SG&A side, you mentioned the number of items. I was wondering if you can elaborate a little bit on kind of what you have been doing and when you would expect to complete these projects?
I think you specifically talked about building up the sales capability in continental Europe, I was wondering when that started and what's the time line of that is?
C. Richard Reese - Chairman and Chief Executive Officer
I don't want to say never, but the answer is, we have a long list of projects and things to invest in that can improve our business. So, whatever runs off through the rest of this year, I am sure will come up with another list for the next year.
But, we’ll mange it within the context that we have said and that is, we are investing for growth in the business because of the opportunity. We are also committed to improving our operating results on a year-over-year basis as we go.
So, we have a long list to pick and choose from. Those we pick and choose from the list, we factor all that in, and choose some.
Michel Morin - Merrill Lynch
All right that's fine. Thank you.
Operator
Your next question comes from the line of Scott Schneeberger with Oppenheimer.
Scott Schneeberger - Oppenheimer
Thanks, good morning. You have alluded in the past to some softness in the UK, I believe you wanted to make some improvements there.
Please give a quick update on how you feel that’s progressing?
C. Richard Reese - Chairman and Chief Executive Officer
I think we have doing well. We have made some management changes internally and externally over the last let’s say 18 so much.
We feel like our sales forces are doing pretty well right now over there, particularly in the UK. We are driving better control systems and processes that our margins… just a variety of things like that, we are making to get headway there.
Brian P. McKeon - Executive Vice President, Chief Financial Officer
I think our business is on plan as we are working through this year and we saw some constrain on growth from the increased destructions and terminations that Richard talked about last year. So, the overall growth rates have been below where we like it to be longer return, but I think we are on track.
C. Richard Reese - Chairman and Chief Executive Officer
But, all the right trends in place to make that step happen. What really drags the UK businesses is this public service business, which is the project that you hear us talking about.
Just to give you a sense, its a different business, it came along, it’s a related business, but it has different financial characteristics. Although we do some of the same work even for governments, but primarily for private sectors around the world, this just happens to be relatively large and it's a kind of business you win a government contract to manage their information and records, the trend seems to be that on the contract you make a fair return, and then they...
when they have budget money, they call you up and spend it, and when they don't, they don't. And it seems like the way they budget over there is they give them a lot one year and take it away the next.
So, you have a good year, bad year, good year, bad year. The truth is they are all good business, and we reluctant to throw out good businesses who make good money and have good returns on capital, and it is one of them.
So, sorry, we will have to keep finding probably.
Scott Schneeberger - Oppenheimer
Thanks. Brian indeed, just kind of following up on an earlier question on this government contract that's moving on through the year.
I think you guys just said that it should continue until the middle of the year, is that a little bit longer tail than you had previously expected?
C. Richard Reese - Chairman and Chief Executive Officer
I am sorry if there is confusion on this. Last year, we highlighted we had two contracts contributed about $25 million in revenue to our results last year.
One is done, and the other one is going to be completed on about the same timetable that we had anticipated. So, when we talked about this, we didn't get into specific quarterly impacts.
It’s something when we put out our guidance for the full year of complementary growth of 2% to 10% that was a key factor and are thinking of whether that number was going to be down a bit year-on-year. So, we wanted to make sure to highlight that.
Scott Schneeberger - Oppenheimer
Okay, thanks. Shifting gears a bit.
I am pretty excited about the Stratify acquisition and how that's progressing there. Could you speak a little bit to, one, the competitive and pricing environment in that space, and then two, will there be additional acquisitions that you will need to make to kind of pad what you have there?
Just a little bit of color on each.
Brian P. McKeon - Executive Vice President, Chief Financial Officer
To answer your second one, never say never on anything. But, I don't see on the horizon the need to acquire in this space unless we find some really Wizbank [ph] something that we are missing.
But, right now, we've got, in our opinion, the best Wizbank out there. In terms of pricing, it is a space you can get all kinds of prices quoted and different customers buy on different basis.
But, our value proposition is to use technology to change the whole way that you run the process and in fact what you wind up doing is you reduce the legal review time, which is where all the real money is. We can reduce it substantially.
We can save you 40% to 50% of the entire review cost and you may pay us more than you'd pay another technology provider who does simple things for you and then you pay your lawyers twice as much money if you would. But, net-net, if you look at the total cost, we are just dramatically cheap, it’s not price issue, it’s just making sure you understand what your cost are.
Even better than that, the way we get at the information, the way we organize it, and the way we accomplish these things is that we also get deeper into the information and we know more about your data than you can find out otherwise using standard ways of looking at it. And that sometimes is between winning and losing.
And that's big money. So, it's super stuff.
Scott Schneeberger - Oppenheimer
Okay, thanks. And one final one, if I could.
Back at the Investor Day, some discussion of maybe changes in perhaps kind of foreshadowing there could be dividends, share repurchase pending, just could you update us on that front?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
I guess I made a mistake, [inaudible] made in my life that to even talk about it... let me be clearly, so everybody on the call knows, what you are talking about.
At Investor Day, I made this statement intentionally, but I made this statement that I had always told shareholders who have asked me over and over, when you are going to think about dividends and share repurchases and so forth. And always...
my answer has always been is, I don't know. We are not thinking about it, because we aren’t anywhere close to even think about, but when we do, I will tell you.
And the truth is, we have started to think about it. We look at the models.
You look at the models. We know what the future looks like.
And we know how to run the business in a levered model and we know that means no matter what we do, we are going to have a lot excess capital. Okay.
So, what I said at Investor Day is, I am meeting my promise to you basically. I have started to think about it… we have started to think about it.
We don't give these kind of things light thought, it's going to take us a while]. And no hurry, so, I am not trying to put a timeframe on it.
But, I am telling it's close enough in my mind. This kind of things takes thought because you don't do things like start dividends willy-nilly because you turn then on, you can’t turn them off.
There is a lot of ways to think about how to create shareholder volume and stock buybacks. Net-net of it is, I fully expect we will return cap, cash to shareholders in due course and we will try to do it an intelligent fashion that benefits our shareholders in the maximum profitable way.
I am not going to go through all the things I have thought about, but we are working on it. Timeframe I wouldn't begin to give you a timeframe.
Scott Schneeberger - Oppenheimer
Yes, thanks very much.
Operator
Your next question comes from the line of Franco Turrinelli with William Blair.
Franco Turrinelli - William Blair
Good morning, Richard.
C. Richard Reese - Chairman and Chief Executive Officer
How are you?
Franco Turrinelli - William Blair
I guess, sort of similar questions to one that was placed earlier. I'm trying to understand that do you think about your services build-out, if you want to call it that way.
If the plan would be to focus on the current areas of competence [inaudible] same kind of land grab that we’ve seen do in the traditional physical business or if you are really seeing more of an expansion of services has being part of the future?
C. Richard Reese - Chairman and Chief Executive Officer
Maybe it’s the third time I’ve said never say never in this call. But, the focus right now, Franco, is just as I have said before, we have accumulated a lot in these businesses we have, knowledge, skill and opportunity.
So, the real focus is getting that to work together in the right ways. That doesn’t mean we will not find other opportunities to acquire, other opportunities to expand around the edges, or fill in low pieces here and there, but we have really set the table pretty well.
It’s now about getting it all to work together and extracting the majorities of the value add of it. It's not a strategy of, let's just go out and buy, buy, buy, I am not really out to acquisitions, they are always part of our kit, our tool set.
Okay. But it is a strategy, we have accumulated a lot.
It is the strategy of building and making the stuff work together and you will get it in the market in the right timeframe, you can easily be ahead of our market or behind the market and those are the kind of things that I worry a lot about. You are right up the [inaudible] I am really already starting to focus lot of my time to do and what I plan to do personally a lot more.
Okay.
Franco Turrinelli - William Blair
Sure. That's helpful.
This February, I was kind of looking back, the last time we talked about destruction was with a total of '03, which is an interesting reflection given what's happened since then.
C. Richard Reese - Chairman and Chief Executive Officer
Yes.
Franco Turrinelli - William Blair
Thanks, Richard.
Operator
Your next question comes from the line of Edward Atorino with Benchmark.
Edward Atorino - Benchmark
Three questions. One on to Stratify, I understand that category has been growing about 30%, 35% in sort of the eDiscovery area, would you care to sort of talk about what Stratify has done against that kind of bogie?
Second, SG&A expenses are almost 30% of revenues, I think that's is an all time high Richard. Is this sort of a new norm because of the change in mix and is there a long-term target?
I thought one path to higher margin was to leverage higher revenues without higher SG&A. Could you talk about that a second?
And then lastly what is sort of traditional box business doing? I know you talk about physical stuff, but what was the growth in the good old-fashioned box business and what percent of revenues is it now?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
Let me try and take this on. In terms of the stratify growth, I think the growth ranges that you talked about are inline with what we are hoping to achieve in the business this year.
So, I can't comment specifically on the market growth, but that's the kind of growth that we are hoping for on that front. In terms of SG&A spending, we've seen increases in SG&A as a percentage of revenue and part of that's driven by some changes in our business mix overtime and as Richard highlighted some of the acquired businesses particularly in the technologies space have relatively higher overhead base, also have higher gross margins in many cases and as we build our full year goals and what we are trying to achieve, we factor those type of dynamics...
mixed dynamics into what we are looking to achieve. So, I think we are comfortable, we are on track for our full year goals and are on track towards our longer-term goals and that factors in potential changes in business mix over time.
Edward Atorino - Benchmark
So, this is sort of the “new norm”?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
I don't know how would you define the norm, but I think...
Edward Atorino - Benchmark
It’s 9.7%.
Brian P. McKeon - Executive Vice President, Chief Financial Officer
I think our goals are to deliver good OIBDA performance relative to our revenue growth and we will balance and trade off impacts from business mix and gross margin and SG&A. Just in terms of the storage business, our global physical storage business was within our target range.
It was at the lower end of target range at 7% to 9% and some of that's impacted by the high level destructions we saw late last year just falling over, but we are within our expected range for this year.
Edward Atorino - Benchmark
And what's the box business as a percent to total revenue now, US?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
Box is roughly half.
Edward Atorino - Benchmark
Half? It’s the same overseas?
C. Richard Reese - Chairman and Chief Executive Officer
The overseas would be more skewed towards the box business. I don’t have the precise number, but...
Brian P. McKeon - Executive Vice President, Chief Financial Officer
It varies by region.
C. Richard Reese - Chairman and Chief Executive Officer
It varies by region, but yet you have skew to that.
Edward Atorino - Benchmark
Thanks.
C. Richard Reese - Chairman and Chief Executive Officer
I am going to try to meet my commitment to keeping the call to an hour and we are about a minute over that. So, we will take one more question and then we will wrap up.
Operator
Your final question comes from the line of Andrea Hirth with Robert Baird.
Andrea Hirth - Robert Baird
Good morning.
C. Richard Reese - Chairman and Chief Executive Officer
Good morning.
Brian P. McKeon - Executive Vice President, Chief Financial Officer
Good morning Andrea.
Andrea Hirth - Robert Baird
First just wondering on the international business. Does that business still grow in the double-digits, if you exclude special projects and acquisitions?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
We are just checking right now, but...
C. Richard Reese - Chairman and Chief Executive Officer
Let us do a little math…
Brian P. McKeon - Executive Vice President, Chief Financial Officer
The internal growth was 12%. It would be close to that level, I think, excluded the complementary.
Andrea Hirth - Robert Baird
Okay. In terms of special projects, was there anything meaningful in new ways [ph] booked this quarter as far as special projects go?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
Unless they were just huge, we don't have the visibility, it's so broadly dispersed across geography and customer bases to really know that on a cumulative basis. We know when you line up super, super giants.
C. Richard Reese - Chairman and Chief Executive Officer
Nothing that we are highlighting.
Brian P. McKeon - Executive Vice President, Chief Financial Officer
I think that we would know of is that way.
Andrea Hirth - Robert Baird
Okay. And then just want to look at pricing little bit, what was the contribution of pricing in the quarter?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
We are making progress in storage pricing in North America and we were up. We did a little north of the 1% range last year and this year we are hoping to move it two percent plus and we feel we are on the right track on that front.
Andrea Hirth - Robert Baird
Okay. So, you still believe that you can get closer to 2% or above this year?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
We are making progress.
Andrea Hirth - Robert Baird
Okay. And then just last question.
This is in terms of the banks and financial institutions and all the turmoil they are experiencing. What has been the impact of that on your business and has it been meaningful yet or do you think that's still something that...
maybe there will be lag effect and you will eventually see some more impact on that?
Brian P. McKeon - Executive Vice President, Chief Financial Officer
We haven't seen anything yet, most of our customers and as one [inaudible], it's more of an impact of working hard to integrate the programs and rationalize them and so forth. Yes, I think we'll see some more of that happening in time.
But, the good news about our business is, even if some of them were to be in serious trouble, they still have to keep their records around. And typically they will get...
they get litigated for years after that. We still I believe have the records for Directional Burn [ph] if I remember correctly, which we are paid for in advance a long time ago.
So, I don't think we will see dramatic impact. I will tell you, we'll leverage model, we watch the capital market carefully, we have tremendous bank syndicates that we appreciate a lot and how your markets have been good to us.
But, we always will do... we will watch those market carefully just to make sure that we have continued access to capital and play conservative as we go into what I believe personally will be some pretty tough times for companies.
We won't get out of an economy un-scaled, nobody ever does. But I'd rather be here than in most companies I know of, looking what I think is going to happen over the next two or three year.
So, obviously I am fairly gloomy about the outlook.
Andrea Hirth - Robert Baird
That's helpful. Great.
Thanks. Nice quarter.
Brian P. McKeon - Executive Vice President, Chief Financial Officer
Thank you.
Stephen P. Golden - Vice President, Investor Relations
Thank you very much. We appreciate it and it’s a little over an hour.
So, let me get on. Not a lot of summary except to just remind you it was a good quarter, but don't get too excited.
We going to hit our year, so think about it from that perspective and hopefully you are hearing the message, we are trying to get you worrying about quarters and so on, because we are not running the business that way, and you spend a lot of time and energy worrying about stuff that don't need to be worried about. Trends are trends.
But, in our business, they take a long time to unfold. You couldn't see it one quarter if you try it.
Every time we tried, we've been wrong. Hopefully, you have gotten that message and then you gotten the message, we feel pretty good about our business and we are on track for the year.
Just to remind those of you, Jeff and Steven will be at Merrill Lynch conference May 14 in New York City and Bob, Brain, and Steven and I will be at the William Blair Conference on June 18 in Chicago. So, we look forward to seeing many of you out there.
Again, thank you for your time, your patience, and I appreciate you tolerating me for the 49th consecutive conference call and you are not over listening to me yet, but it's probably the last time I'll be dragging so long. So, have a very good day.
Thank you.
Operator
Thank you. This concludes today's conference.
You may now disconnect.