Oct 30, 2008
Executives
Stephen P. Golden - VP, IR Bob Brennan - President and CEO Brian P.
McKeon - EVP and CFO
Analysts
Kevin Mcveigh - Credit Suisse Andrew Steinerman - JP Morgan Michel Morin - Merrill Lynch Franco Turrinelli - William Blair David Gold - Sidoti & Company John Healey - FTN Midwest
Operator
Good morning. My name is Kelly, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Iron Mountain Incorporated Q3 2008 Earnings 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 will now turn the call over to Mr.
Stephen Golden, Vice President of Investor Relations. Please go ahead.
Stephen P. Golden - Vice President, Investor Relations
Thank you, and welcome everyone to our 2008 third quarter earnings conference call. After my announcement this morning, Bob Brennan will give his state of the company remarks, followed by Brian McKeon who will deliver the financial review.
When Brian is finished, we'll open up the phones for your questions and provide the answers. First, a quick word on the new starting time for our quarterly earnings conference calls.
We believe a full discussion of our results, sooner rather than later and closer to the timing of our press release enhances our overall disclosure, especially given the current state of the capital markets. We appreciate the importance of timely distribution of information and we hope you find this helpful.
As a note, 8:30 will be our standard start time going forward. Next, I'd like to thank everyone who joined us for our annual Investor Day events earlier this month.
It's an event we look forward to every year, and hope you found the presentations both interesting and informative. As always, we appreciate your continued support.
For our custom, we have a user-controlled slide presentation on the Investor Relations page of our website at www.imountain.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 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 or OIBDA and free cash flow before acquisitions and investments are metrics we speak too 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 for the appropriate GAAP measures as required by Reg G at the Investor Relations page of our website, as well as in today's press release.
With that, I would like to introduce Bob Brennan, our President in CEO.
Bob Brennan - President and Chief Executive Officer
Thanks Stephen. Good morning everyone and thank you for taking the time to join us for our Q3 earnings call.
Messages... the purpose of our call today is to let you know that we are pleased with our performance.
We are as expected feeling the pressures associated with this environment, but we believe that they are very manageable. And that we in turn can hit the targets that we've set for ourselves.
As Stephen said, it was great seeing you all at Investor Day on October 8th. We thought it was a good day and appreciate those of you that chose to attend, whether in person or via the web.
We always appreciate the opportunity to meet with you, highlight the health of our business as well as speak to our outlook. Since we just spoke to many of you on Investor Day about our strategy in detail, today we're going to go through our Q3 results, and provide a very brief update on areas of progress and advancing the strategic agenda that we set out for you on Investor Day.
The big issue that's developed for us in the past few weeks has been the swings in the currency market, and its effect on our reported results, which we will explain in deeper detail. Before we begin, I would like to take a moment to reinforce some of the key themes that we shared with you at Investor Day.
The first point is that Iron Mountain continues to perform well. We achieved solid 8% internal growth again in Q3, and remain on track to sustain targeted 79% internal growth this year, and again next year in 2009.
And while we're performing well across all our segments, I want to point out that our North American performance in particular is doing quite well where we continue to drive strong revenue and profit gains benefiting from improved execution and customer service. The team in North America is doing a great job in driving standardization and uniformity in our business, while increasing customer satisfaction.
We're very pleased with their performance. The second point that we made at Investor Day and that I want to reiterate here, is that we're well positioned in terms of cash and financing capacity.
Our team has made great progress in strengthening our balance sheet under the leadership of our treasury team and the strength of our business model. We're taking a conservative approach on this front in the current environment.
We currently have over $300 million in cash and nearly $400 million in additional debt capacity under a well diversified senior credit facility. Again, I want you to know that we're being conservative.
As you know, we have no meaningful debt maturities until 2012, and we're well positioned to fund our business over the near, medium, and long-term. Most important point that Brian and I wanted to get across at Investor Day is that we're committed to delivering strong financial performance through a disciplined approach to management execution.
We continued to drive solid gains in gross margins in part because we are focused on capturing the value that we have created for our services through pricing excellence. We stay close to the customer, the pipeline and our services in this timeframe as a relationship based services business, we have a daily polls on our customers' behavior, and we're being particularly careful to stay highly visible, with both of our employees and our customers as well as you.
We are exercising cost and capital spending discipline, which is supporting outlook for strong profit gains and significantly improved capital efficiency this year. And we expect to sustain this progress going into 2009 and forward throughout 2009.
And as we highlighted at Investor Day, our goals are to drive constant dollar revenue gains of 7% to 9% and 8% to 13% OIBDA growth in 2009, without assuming any benefits from acquisitions. So the bottom line is I am pleased with our performance and our outlook.
And I believe we're well positioned to sustain this performance moving forward, because we do have a resilience business model. I do, however, expect impacts from a soft economy, particularly on discretionary costumer spending.
And now how on behaving as it relates to discretionary spending and that which is discretionary, we're being very, very disciplined and careful about. There is an element of our business that's discretionary in our costumers' eyes and we have to manage that carefully.
But the majority of our business flows from our predictable, recurring storage foundation, so those impacts around discretionary spending are quite manageable. This foundation reinforces our confidence and our commitment to deliver continued strong financial performance.
So, as I'm pleased with our performance, we sill have this FX issue. And our results can and in fact are being impacted in the near term by significant changes in foreign currency exchange rates.
As you all know, the U.S. dollar has appreciated dramatically in recent months, with key currencies like the pound, the euro, the Australian and Canadian dollars having loss between 20% and 30% of their value, with accelerated declines just over the past few weeks.
Because our enterprise results are reported in U.S. dollars, significant changes in foreign exchange rates can have a meaningful impact on our reported results, particularly when they change this quickly.
In Q3, significant swings in FX rates required us to record large non-cash charges in deferred tax provisions, which in turn lowered our earnings per share. We're also updating our Q4 financial outlook to reflect an anticipated 5% reduction in revenue and OIBDA growth related to recent FX volatility.
Brian will take you through a detailed review of these developments in just a few minute. But I want you to know that FX is not a reflection of the health of our business at Iron Mountain.
Our underlying operating performance is solid and we fully expect strong performance going forward. Our businesses here in the U.S.
and around the world continue to perform well, this is evidenced in our Q3 operating results. We continued this target strong internal revenue growth which is foreign exchange neutral.
And as Brian will cover the true economic impacts from foreign exchange volatility to Iron Mountain are also mitigated by some key factors. First, as a service company our cost are in local currency, so we don't face exporter type risks.
We've matched our long-term assets and liabilities to our global treasury program and we are not repatriating international funds, but rather investing to grow the international business, using local currency cash flow and cash flows and financing. So, we don't rely on bringing cash from overseas to fund our business.
As you know, we have a strong business model. While factors such as foreign exchange may fluctuate over time, the strength of the Iron Mountain model is sustained, as is our commitment to driving towards the great potential we see for our business.
Remember, this potential is driven by the exponential growth in information, and the regulation and complexity that comes with that growth. We're the leaders in protecting and storing information and that business model remains very strong.
So the business is good, the FX fluctuations have been surprising but there are no surprises in the business itself. And as we said on Investor Day, nothing changes quickly in the underlying business.
So, let's turn to reviewing the highlights from our third quarter business performance. Q3 was another solid quarter for Iron Mountain as we delivered strong overall revenue and comfortable OIBDA growth of 12% and 14% respectively.
Both numbers exceeded the top end of our forecasted ranges. We saw strong growth and performance across all business segments.
North America did exceptionally well, internal storage growth remained solid at 8%. We also delivered overall internal revenue growth of 8% for the quarter as strong core service growth offset expected pressures on some of our complementary service revenue streams.
So, let's go through each of the reporting segment. As I mentioned before, North American Physical segment is doing great, supported by strong execution from the team.
We are seeing benefits of strong service revenue growth, 13% internal growth gains on this front. We continued to drive solid growth in our North American Shredding Business, and this business is built on investments that we've already made, that really quite frankly can't be matched by our competition, as that business, evolves we build that we're very well positioned.
We're also seeing benefits from our focus on capturing higher value for our services through pricing. As I have described on Investor Day, we have already invested in having much better facilities, much better chain of custody, stronger systems, and we think the best work force in our industry, and we believe that we can realize value for that on a sustainable basis.
We continued to drive solid profit gains in North America where storage margin is strengthening, as we increased utilization of our physical network of our buildings and vehicles, and we're becoming increasingly smarter about how we manage workflow. We're seeing steady benefits from several productivity initiatives in North America, and I am very pleased with the performance of the team.
They really are humming and we intend to... we really expect their capability to continue to improve and its capability that we can export to our international businesses.
We're focused on building on the progress that's been made in the North America as we head into 2009. This is the foundation of our business and it's the foundation for delivering against our financial objectives over this short, medium, and long-term.
Now let's turn to International. Our International segment also reported solid results this quarter.
As I mentioned at Investor Day, with consolidated leadership of our International segment under Marc Duale, formally the President of Iron Mountain Europe. Marc joined us two and a half years ago and as a strong international business executive with extensive experience.
This will allow us to take a very balanced approach to managing our investments across the entire portfolio of international businesses. And I expect that Marc and his team will drive improved organizational capability around the globe and drive offering leverage through the infrastructure that's been built, particularly in Europe.
Our core revenue growth in international was strong for the quarter, supported by consistent store revenue gains. Complementary service revenues came under pressure, as we expected, with the completion of the second larger European special project, we have been discussing with you for the last two quarters.
So, let's talk about Iron Mountain Digital. Digital posted another solid quarter, supported by continued benefits from growth in new services.
As you know, we're the leader in storage asset service, having built up strong market positions in distributed data protection and having formed strong partnerships recently with Hewlett-Packard, IBM and PricewaterhouseCoopers. Our Stratify acquisition in the space that Stratify occupies that we discovered remains quite exciting for us.
We continued to exceed our expectations and drive our leadership in this field. We continue to expect our digital services to be a strong growth driver in a sustained long-term way for Iron Mountain and are pleased with their performance in Q3.
So, on balance; we had a very good Q3 with solid underlying performance across all of our major segments, North American Physical, International Physical and Iron Mountain Digital. Let's talk about the market just a little bit.
In terms of the overall market environment, as expected, we are seeing impacts from a slowing economy on more discretionary revenue areas. Complementary service activity has slowed particularly with respect to more discretionary areas such as fulfillment services and software license revenue.
One is a marketing service essentially and the other is a deferral expense. We expect to continue...
to see continued pressure on complementary revenues, which represented about 15% of our overall revenues as we move forward. This part of our business does in fact fluctuate, and will continue to fluctuate but we believe it's manageable.
I spent a lot of time with our customers and a lot of time on the road. And they are facing a tremendous amount of pressure.
It's particularly acute for those in the financial services sector which represents approximately 20% of our revenue. But we're able to help them with that pressure.
Where we see them moving is, there is a long-term project that brings long-term benefits they are tending to defer on that. What we're able to help them with though, is we can offer in most cases a short-term benefit with some short-term activity that drives out their cost, drives down their complexity and drives their compliance.
Right now, they are most interested in cost. But we're able to help them with that.
So, we feel that we can manage the pressure that they are facing, as well as move to more of a short-term cost focus with our customers on special projects. So, I think it's important to remember that our services are particularly important regardless of economic conditions.
We've had solid business across our businesses, largely because what we provide is critical. Our customers remain very much focused regardless of their economic condition on reducing cost and reducing risk.
And as you might expect, we're seeing increased interest in certain areas such as litigation support, and we... and compliant records management.
Information have to be captured and protected as well as disposed off regardless of what's going on externally. If anything, regulation sensitivity is expected to increase in this time.
So, in other words, we remained very empathetic with our customers. We worked with them day-in and day-out because we're service business we...
it's not like we come in and out of our relationship with them. So, we understand their pressures as they go through them.
We have great relationships with them. And we're focused on solving their problems.
In other words, the market conditions remain strong for the short, medium, and long-term. We have a very large and expanding market where we are the leader.
So, the business is performing well. Our customers are in fact under pressure.
We feel that we can manage that pressure and the market conditions remain good. So we...
the key for us here is to take a very disciplined focus in this environment. While we maintain a high standard of responsiveness to our customers and that yields incremental growth opportunity, we're also very careful to operate with a high level of discipline around cost and capital management to ensure that we deliver against our targets.
It's also very important that culturally you understand how we think of this time. It's a time for a very visible leadership.
And so we are spending an awful lot of time with our customers and our employees to let them know that Iron Mountain is solid business, where we can help solve their problems, that we're a very reliable employer, we're a very reliable service provider. And it's just very important that we're highly visible.
We're trying to do the same with you. But we are also...
but we're being very disciplined. So, let me talk about acquisitions in organic versus inorganic growth, because acquisitions have been key to our strategy and we expect them to play a part in our strategy going forward.
But I want to highlight that our focus is on executing against inorganic growth opportunity right now. We've seen great benefits in this front this year, as reflected in the our strong performance for North America.
And as attractive opportunities will present themselves in this timeframe, but we want to assure you that our operating discipline extends to our acquisition strategy as well. We believe in holding a conservative approach on this front in this environment.
We see opportunities to drive organic growth and we will maintain this focus in the future. So to sum up my remarks, I'm pleased with our results this quarter and so far this year our business is performing well and it's on track.
We will experience some impacts in the near term from large punctuations and factors such as exchange rates. But our operating performance and our outlook remains solid.
And with it, we assure you that we continue to maintain a very disciplined approach as a management team. And, I believe we're well positioned to build on the progress that we've made to-date with what is the large in expanding market opportunity for our services.
So, thank you again for joining us this morning. And at this point, I'd like to turn the call over to Brian for our financial review.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Thanks Bob, and good morning everyone. Q3 was another solid quarter for Iron Mountain as we posted strong revenue growth and OIBDA gains ahead of our forecast, supported by 8% internal growth.
These results reflect solid operating performance across our business units. As usual today, we'll review our quarterly results and provide an update on our year-to-date cash flow performance, capital spending trends, and our debt position.
Given, unusual recent changes in foreign exchange rates, we'll also spend time today discussing the impacts of foreign exchange on our reported results. Significant fluctuations in FX rates during the third quarter required recognitions of large non-cash charges and deferred tax provisions, which lowered our reported of EPS by about $0.17 per share.
The record strengthening of the U.S. dollar in recent weeks is also requiring us to make adjustments to our 2008 full year guidance.
As projected, FX impacts in the fourth quarter were more than offset operating upsides in the business. As we discussed at Investor Day, fluctuations and factors such as currency rates can impact our reported results.
These factors however don't alter the fundamental soundness of our business, which is performing well and is on track. Let's now turn to slide four to review the key messages from today's review.
The primary message that you should hear in today's review is that our operations are performing well. Iron Mountain delivered strong financial results in Q3 with revenue growing 12% and OIBDA growing 14% on a comparable basis, excluding asset gains and losses.
We continued to drive solid business performance in a challenging economic environment. This reflects the strength of our business model as well as benefits from a disciplined management approach.
We posted strong revenue gains across all major business units, supported by 8% internal growth, the benefits of our major acquisitions, and favorable year-over-year foreign currency movements. OIBDA growth was supported by solid gains in gross profit and moderated cost growth, which supported an increase in comparable OIBDA margins.
We've maintained an excellent liquidity position, following the successful completion of the refinancing transaction, including the sale of $300 million of 8% bonds due to 2020 and the redemption of $72 million of 8.25% percent bonds due 2011 earlier this summer. We currently have over $300 million in cash and about $400 million of availability under our revolving credit facility, which is well diversified.
As we look forward, our operating outlook remains strong. We're on track to deliver 2008 performance consistent with our original 2008 goals of 7% to 9% internal growth, 10% to 13% revenue growth and 10% to 14% OIBDA growth.
As we announced at Investor Day, we expect to build on this performance in 2009 with plans for continued strong 7% to 9% internal growth next year. As noted, the unusual strengthening of the U.S.
dollar in recent weeks is having impact on our reported results. We'll spend sometime isolating the impact of these changes on our Q3 results and on our reported growth outlook in Q4 in 2009.
We'll also try to put these near term fluctuations in currency in a broader economic context for Iron Mountain. Now, let's move onto looking at the details of our performance on slide five.
Slide five, compares results for this quarter to Q3 of 2007. Overall, we had another strong revenue quarter, supported by growth across our key business segments, which drove an overall revenue increase of 12%.
Our largest segment North American Physical posted internal revenue growth of nearly 10%. We saw solid growth across our records management, data protection and secure shredding product lines.
Overall growth was supported by solid storage gains and strengthening core service revenues. These gains are offset anticipated so often as a more discretionary areas such as fulfillment services.
Our international business was up 11% overall. Internal growth was 4%, supported by continued strength in our Latin American business.
As expected, we saw declines in complementary service revenues in Europe as the second major project we've been speaking was... about was concluded in the third quarter.
These declines reduced international revenues by about $8 million or about 5% in Q3. Offsetting these impacts, international growth benefited from select acquisitions that are strengthening our global footprint and for favorable year-over-year foreign exchanges which together added 7% to revenue gains.
Our Digital segment also drove strong revenue growth with 44% gains overall, supported by 10% internal growth and continued strong performance from Stratify. We saw solid growth in storage revenues and as expected some weakness in more discretionary purchase areas, such as software license sales.
Revenue gains helped to drive a solid 14% year-on-year improvement in gross profit. Gross margins were up for the quarter, compared to the same prior year period, supported by strong storage margins, growth and high margin services as well as benefits from the sale of the low margin data product sales business and sustain higher recycle paper pricing.
Year-on-year SG&A growth moderated to 14% in the quarter, slightly above the rate of revenue growth. As noted, higher rates of overhead growth this year have been driven by the integration of recent technology acquisitions and carryover impacts from investments in security, international sales resources and infrastructure initiated in 2007.
We expect SG&A growth to continue to moderate in the fourth quarter. OIBDA, which grew 10% on a reported basis to $211 million in Q3, 2008, included $2 million of asset write-offs related to building moves in North America.
Included in our Q4 guidance is $2 million of write-offs associated with additional building moves. Note that 2007, Q3 results included a $5 million net gain on asset dispositions.
On a comparable basis, excluding asset gains and losses, OIBDA grew 14% in Q3, 2008 compared to Q3, 2007. Depreciation was $65 million and amortization was $10 million for the quarter.
The increase in amortization was driven primarily by technology acquisitions completed in the second half of 2007. Operating income was $136 million for Q3, 2008 at 6% versus the prior year as operating gains were partially offset by the assets write-offs and increased depreciation and amortization, driven by 2007 capital spending and acquisitions.
Slide six breaks down our overall revenue growth. It shows internal growth by major service line as well as the impact of acquisitions in foreign exchange, which added about 2% and 1% respectively to our growth rates for the third quarter.
Internal revenue growth for the quarter was 8%, within the range established for our full year growth calls. As a reminder, we removed the 2007 and 2008 revenues associated with the divested product sales business from our internal growth calculations.
Internal growth was comprised of 8% storage growth and 9% service growth, reflecting continued benefit from expansion of less capital intensive services. Core service internal growth improved to 13% in Q3, supported by strong performance in North America, including benefits from higher fuel surcharges and strength in pricing.
The internal growth rate for complementary services moderated in Q3 as expected. Gains and recycle paper revenues were offset by reduced special project activity.
As noted earlier, the completion of two major European public sector service contracts over the last year resulted in an $8 million reduction in revenues. This cause an 8% negative impact to Q3 complementary service growth.
We've also seen lower growth in areas such as fulfillment services and software license sales, which are areas more likely to be impacted by economic conditions. Complementary service revenue which represents nearly 15% of overall revenues can vary overtime.
Given fluctuations and demand and timing for special project activity, and variation of factors, such as recycle paper pricing. Despite these impacts, our overall internal growth rates have remained solid through the year and we're on track to deliver against our full year internal growth goals.
Moving on with our review of our Q3 P&L performance, slide seven bridges our Q3 operating income to net income and EPS results. Q3 results on these fronts were basically as expected excluding impacts from the records strengthening of the U.S.
dollar which pressured our reported net income and EPS. As discussed, operating income for the quarter was up 6% to $136 million as operating gains were partially offset by year-on-year impacts from asset write-offs and increases in depreciation and amortization.
Our Q3 interest expense was $59 million as expected and inline with Q2. We now expect interest for the full year to be approximately $240 million.
Net income for the quarter of $11 million or $0.06 per diluted share was impacted by the record strengthening of the U.S. dollar since the end of the second quarter of 2008.
The impacts to other expense in our effective tax rate from FX, from changes in FX rates reduced reported EPS by approximately $0.17 per share in Q3. We'll talk about this in more depth later in our presentation.
But rapid changes in foreign currencies during the quarter can result in meaningful accounting impacts as we mark our debt to market and adjust estimated deferred tax effects for these changes. Large declines in foreign currencies versus the U.S.
dollar during the quarter drove a net $16 million non-cash charge in other expense. The net $16 million expense is comprised of offsetting foreign currency gains the losses which are incurred in different tax jurisdictions.
As a result we recorded in additional $20 million non-cash tax provision. The impact of these two charges rates are effective tax rate to 81.6% for the quarter.
Please note that these effects do not affect cash flow and are non-recurring in nature as they relate to changes in foreign exchange rates during the quarter. Our effective tax rate before the impact of any foreign currency rate fluctuations and other discrete items for the third quarter was approximately 40%, up from the estimated 38% rate due to a reduction in our allowable interest deductions in certain foreign subsidiaries.
We're estimating our tax rate before discrete items for 2008 to be approximately 39%, up slightly due to this impact. After 2008, we expect our tax rate, excluding the impact of discrete items to decrease over time by approximately 2%.
Based on the continuing strengthening of the U.S. dollar since September 30th, we expect some more dynamics to be in play for the fourth quarter, with likely recognition of non-cash charges to other expense and increases in our reported effective tax rate.
At this point, we can't predict the year-end exchange rates in order to measure the size of the impact, but want to reinforce that it will be a non-cash non-recurring effect. Turning to slide eight, let's look at our year-to-date performance.
You can see that Q3 operating results build on the solid performance we posted in the first half of 2008. Balance growth across are key businesses and service lines is supporting solid overall revenue in OIBDA gains and reinforcing our confidence that we're on track towards delivering against our strategic and financial goals this year.
Net income for the first half of 2008 was $81million compared to $125 million for the same period in 2007. The key factors impacting the 2008 results or other expense, which was $13 million in 2008 versus other income of $2 million in 2007, in a significantly higher effective cash rate which was 54% versus 27% in 2007.
Fluctuation in foreign exchange is the key driver of changes in both these factors. The impact of the foreign currency rate changes on other expense and effective taxes have resulted in a $0.16 reduction and fully diluted earnings per share in 2008.
We'll shift now to reviewing drivers of our cash flow performance. Slide nine summarizes our capital spending for the year-to-date and our updated outlook for 2008 compared to 2007 full year results.
We're maintaining our outlook for improved capital spending efficiency this year and revising our 2008 capital spending guidance downward to reflect recent foreign exchange rate changes. Our CapEx for the first nine months of 2008 was $239 million, including $19 million for real estate.
Traditionally, the second half of the year is heavier with respect to CapEx spending 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 expect to finish the year with approximately $430 million of CapEx spending.
This is down slightly from our updated estimate provided at our Investor Day reflecting the strengthening of the U.S. dollar over the past few weeks.
Let's now move on to slide 10 and look at free cash flow for the quarter. Slide 10 highlights our year-to-date cash flow performance compared to the same period in 2007.
For the first nine months in 2008, free cash flow before acquisitions and discretionary investments in real estate was $86 million. The year-on-year decrease in cash flow reflects the payment in Q1, 2008 of the unusually large 2007 year end CapEx accrual balance of $60 million, partially offset by higher operating cash flow.
Keep in mind that free cash flow is best looked at on our full year basis as the timing of certain cash events is not consistent through the year. For example, the first quarter, historically our lowest cash flow quarter was impacted by the 2007 CapEx accrual, and the payment of annual bonuses.
For 2008, we now expect free cash flow before acquisitions and discretionary investments in real estate to be approximately $50 million to $100 million. This is an increase from our last outlook, primarily driven by lower expected capital spending in 2008.
As noted on our last call, 2008 free cash flow is impacted by the 2008 CapEx accrual I just spoke of being paid in Q1. Now, let's turn to slide 11 for a review of our current debt and liquidity position.
In terms of our debt portfolio, we ended Q3, 2008 in a strong position. Our weighted average interest rate is 7.1% and we're 78% fixed.
Consolidated leverage is now 4.1 times at the low-end of our target range of four to five times OIBDA and well within our 5.5 times covenant alignment. Maturity is now at 7.4 years with no meaningful repayment obligations until 2012.
As Bob mentioned in his opening remarks, we have a very strong balance sheet, and we're well positioned in terms of cash and financing capacity. As noted, we successfully issued $300 million of 8% senior subordinated notes due 2020.
We used the proceeds to pay down our senior credit facility. We also redeemed the remaining $72 million of outstanding $8 million in the quarter percent notes due in 2011 in a transaction that was completed in early July.
As a result of these activities, our liquidity position remains strong. We currently have over $300 million in cash and nearly $400 million in addition of borrowing capacity.
While we maintained a strong operating outlook, we anticipate maintaining a more conservative approach to cash management in the current environment. Before I turn to financial outlook, I'd like to spend a moment discussing foreign exchange as the recent strengthening of the U.S.
dollar will have an impact on our reported results. 5/12 starts this discussion with a higher level perspective on economic impacts from foreign exchange for Iron Mountain.
Iron Mountain does business around the globe with about a third of our revenues are roughly $1 billion, coming from markets using non-U.S. dollar currencies.
In this context, our reported P&L results, which are recorded in U.S. dollars can't be impacted by changes in FX rates.
In terms of our underlying business and economics however, it's important to understand a few key factors. The first and most important factor is that our international business performance, which is conducted in local currency, is solid, and it's not impacted by FX changes.
Year-to-date internal growth in our international business is up 8%, despite anticipated pressures from the completion of a major public service contract in Europe. We continued to maintain a strong outlook for our international growth and financial performance.
Secondly, two economic impacts to Iron Mountain in the near term from FX changes are mitigated by some key factors. As a service company, our costs are match with the revenues in local currencies, so we don't face the same type of currency exposure as an export of our products.
Through our global treasury program we've also aligned our international assets and debts in the same currency. We also have international businesses that's funded with local currency cash flows and debt financing.
That's supporting our plans for continued investment and business expansion. As such, we're not exposed to reliance and repatriation of funds from our international operations, which could be pressured by the near term appreciation of the U.S.
dollar. While these factors mitigate the economic effect of FX volatility, our reported financial results can be impacted by significant short-term changes in rates.
Let's turn to slide 12 to review how these changes are affecting our financial outlook. As Bob mentioned earlier, we've seen a historic strengthening of the U.S.
dollar against most major currencies. This will have no effect on our internal growth rates.
It will result, however, in a negative impact to our reported revenue growth until we work through these comparisons over the next four quarters. The chart on the left shows the change in four major currencies, the Australian and Canadian dollars, the British pound and the euro, throughout 2008, indexed to year-end 2007 rates.
These currencies represent more than 83% of our foreign revenues and nearly 27% of our enterprise revenues in 2008. As you can see, these currencies are weakened between 20% and 30% since the end of the second quarter, with more than half of each decline coming since Investor Day earlier this month.
These rapid changes have a couple of key impacts on our reported results. First, in terms of our revenues and OIBDA, which are reported in U.S.
dollars, we need to lower forecast estimates to reflect current FX rates. As the table on the right indicates, we estimate that a reported revenue in OIBDA growth for Q4 will now be reduced 5 percentage points due to the FX changes, following positive impacts for the year-to-date.
As noted earlier, we'll also likely see non-cash other expense charges and impacts on our Q4 effective tax rate, related to mark-to-market accounting, reflecting large FX changes already seen this month. As for 2009, while we're not updating our overall outlook at this time, at current rates FX would reduce 2009 revenue and OIBDA growth by about 6%.
This compares to the 3% negative impact we estimated as part of our preliminary 2008 guidance at Investor Day. It's important to reinforce that FX movements don't impact the underlying fundamentals of our business.
We maintain a solid outlook for our underlying operating performance, but we'll face some tougher comparisons in terms of our reported results in the near-term due to the record strengthening of the dollar. Let's now look at how this impacts our outlook for the balance of the year.
Slide 14 represents a real foot of our full year outlook from the guidance we issued in our Q2 earnings call at the end of July to today's guidance. For illustration purposes, we're using the mid point of each outlook.
As you can see, absent the impacts of the foreign currency rate changes and the $4 million of asset write-offs I spoke of earlier, our outlook for the second half of the year is actually improved. We're projecting net upside of $20 million in revenues and $7 million in OIBDA in our FX neutral operating performance versus our earlier midpoint guidance.
Note that our Q4 outlook is somewhat below level as implied in our last forecast. This reflects timing of some project revenues which benefited Q3 results and adjustments to our Q4 outlook to reflect updated estimates in areas such as paper pricing and some expected charges related to our UK real estate rationalization program.
Despite second half performance upsides however, we do need to lower our estimates per reported revenue in OIBDA to reflect a large recent changes in FX rates. Please turn now to slide 15, where we'll review our updated outlook for the balance of the year.
Slide 15 summarizes our updated financial outlook incorporating net impacts from operating upsides offset by negative FX from foreign exchange. Our full year revenue outlook is now $3.35 billion to $3.65 billion, a growth of 11% to 12%.
This outlook reflects consistent expectations for 7% and 9% internal growth this year. We're now targeting full year operating income of $473 to $488 million.
This would imply an OIBDA range of $768 million to $783 million for the year or growth of 11% to 13% on a comparable basis excluding gains and losses and asset write-downs. We're reducing our full year CapEx forecast to approximately $430 million due primarily to the weakening of the British pound, sterling and the euro.
At midpoint performance this would equate to a solid reduction in capital spending as a percent of sales in 2008, building on our 2007 progress. Our expectations for Q4 performance are shown here as well.
Note that our guidance for Q4 is a little wider than usual, given recent volatility in factors such as FX. In summary, we had a solid quarter reflecting solid operating performance across our business.
Our business is performing well. We remain on track to deliver against our financial calls and intend to build on this progress in 2009.
Thanks and we'll now open the phones to take your questions. Question And Answer
Operator
[Operator Instructions]. Your first question comes from the Kevin Mcveigh with credit Suisse.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Hi Kevin.
Kevin Mcveigh - Credit Suisse
Hey guys. Nice job on the quarter.
Just one quick thing Bryan, at some point your not updating the '09 guidance at this point, is it fair to say there maybe some incremental positive impact that could offset the incremental 3.2 from the currency headwind versus a couple of weeks ago in the business?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
We just didn't want to get into a formal update of guidance so quickly after I Day. We're maintaining our underlying operating outlook Kevin.
Obviously, FX has moved quite a bit. We wanted to highlight that for you and we'll be refining our outlook in the coming weeks.
But we're not changing our underlying outlook and we can't predict the FX right now. They could obviously move in a different direction and we'll...
year end we'll give you an updated perspective on that front.
Kevin Mcveigh - Credit Suisse
Great. And then just a quick, the core services...
real nice job on the 13% internal growth. Can you just break that down little bit kind of see where the strength was, and kind of what you're thinking into the fourth quarter as well?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
To our note, it was a strong quarter, it built on a strong quarter we had in Q2. Would you get some benefit from fuel surcharge increases.
Just to revisit the fuel surcharges and our energy cost kind of move together, we... for our transportation related services.
We see a benefit in revenue when our underlying transportation cost is going up and obviously that we have some offsets in higher costs. In terms of our revenue growth that added about 4% to the core service growth rate in Q3.
So having said that we're still at a solid 9%. We would expect some mitigation in the fuel surcharge increase, just given that oil prices have come down, that will also see some lowering of our transportation cost, so those should net...
and other than that I think we're maintaining solid core service growth.
Unidentified Company Representative
This kind of great job.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Yes. The pressure on our business is more in the discretionary areas like complimentary services I noted that we are getting some benefits from higher pricing and we are strengthening our service margins in markets like the U.S.
And we're continuing to see good activity in the storage and related service fund its the pressures that we've seen in the business or as expected more in the complimentary areas.
Kevin Mcveigh - Credit Suisse
Great. I'll get back in the queue.
Thank you.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Thanks Kevin.
Operator
Your next question comes from Andrew Steinerman with JP Morgan.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Good morning, Andrew.
Andrew Steinerman - JP Morgan
Hi, there. My question is about the fourth quarter implied up margins compared to the third quarter.
I heard in your prepared remarks, some comments about timing of projects third quarter versus fourth quarter, maybe you could jump in to that. And I just want to be very clear, and I think you're saying that FX does not affect margins fourth quarter versus third quarter.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Yes let me try to take that on. At mid-point, our outlook for Q4, Andrew I believe would be similar margins between Q3 and Q4 kind of in the 20, I'm sorry Q4 would be in the 26% range, and we have a similar kind of year-over-year improvement.
I think we're trending sort of in the... if you take out some of the noise around the asset gains and losses, I think we're in the 50 to 100 basis point improvement.
So we're pleased with that kind of progress and we implied in our outlook for 2009 is continued progress on that front. I just...
the point on the timing of projects spent, when we did that role forward, I was just trying to highlight obviously, we had a bigger upsize in Q3 relative to our mid-point guidance. And I was just trying to help explain why you didn't see more flow through internally, like enhanced results, it just has to do with timing between Q3 and Q4, and as well as some other select thing that we book into the outlook.
Andrew Steinerman - JP Morgan
Okay. And then FX coming.
Does FX effect margins fourth quarter versus third quarter?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
From a margin point of view, it's obviously complicated, but the simple answer is FX changes don't really have an impact on margin, because obviously our revenues are impacted that our costs are also impacted as well. So, it's complicated, but the simple answer is that it's not a big margin impact.
It does obviously impact the absolute reported levels for the enterprise.
Andrew Steinerman - JP Morgan
All right. And last question, in your prepared remarks you talked about SG&A growth moderating in the fourth quarter, obviously I remember the higher spent a year ago.
So, my question is, is this more anniversary SG&A year-over-year or is there some SG&A management in the fourth quarter, versus the third quarter of this year.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
I'll let Bob talk about the cost discipline that we've been putting in place. There is some anniversary benefit as we pointed out, last year we had about $5 million of cost as we closed out the books, we do some final shootouts they'll kind of move to vendor action last year.
So we will assuming everything is normal, this year we'll have some favorability. But more significant factor is that we've been quite disciplined in terms of our cost management
Bob Brennan - President and Chief Executive Officer
From a cultural perspective, Andrew being very careful on our own discretionary expense spending. And that in just in the past few weeks, I've got a couple of projects that I thought we put in place at this timeframe that we're ultimately benefit Iron Mountain, but in near terminal pretty comfortable staying in money and we are being very careful here and adding 00to over head especially in corporate function.
We are not offering that production revenue, and our growth capacity in the field, but we have been very careful with all the head growth and we expect that to result in moderated growth in SG&A.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
I want to point out one of the factor to you, Andrew, which is a lot of the growth that we saw year-to-date are the biggest driver of our SG&A growth being ahead of revenue growth in the first half of the year, was the integration of technology acquisition. And obviously, we've been disciplined on that front as well this year.
We'd be working through those comparisons as fast as we in the fourth quarter and that's also a fact of contributing.
Andrew Steinerman - JP Morgan
Okay. That sounds good.
Thank you so much.
Operator
Your next questions comes from Michel Morin with Merrill Lynch
Unidentified Company Representative
Hi, Michel.
Michel Morin - Merrill Lynch
Good morning. I just wanted to double check something on your slide 14, where you rolled forward the guidance.
It looks like very good performance in that 20% and $20 million upside to the top line generated, what is essentially a 35% margin. S, could you point out for us kind of where you think that upside has been coming from and why it's generated that much better profitability?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Obviously, a lot of puts and takes in that. I would say in simple terms, we are seeing some benefit from higher margin service growth.
I think it's more of a mix of business impact but its complicated Michel. It's not a...
there isn't anything underlying the kind of the performance of the business. It's...
there is some things at the margins that helps to support that.
Michel Morin - Merrill Lynch
Okay. Alright, that's fair.
And then could you explain for us a little bit how it is the FX related tax provisions are non-cash and maybe you talked about that in the prepared remarks and I may have missed it?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Yes, well in the near term. It's a FX obviously fluctuates up and down and the tax provisions are related to as we mark our debt to market We have to reflect the changes that occur in high tax...
relatively higher tax jurisdiction and lower tax jurisdictions. And, we recorded deferred tax division.
So, our debt is six to 10 years out. So, if nothing changed between now and then, there could be a cash impact.
But we've seen benefits... what we're seeing this quarter is actually a mirror of the benefits that we saw as the dollar was weakening as foreign currency is over the last couple of years.
It just happened to occur all at once, so we had a big impact on the quarter. There could be a realization, but it's going to be tied to the maturation of the debt, which is long-term at six to 10 years.
Michel Morin - Merrill Lynch
Alright. And so this kind of impact is something that obviously could repeat itself in the fourth quarter and into '09 if we continue to see this kind of dollar strengthening?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
No, I do want to reinforce in the fourth quarter. We anticipate that we're going to have an impact.
We're not quantifying it, but post September 30th, there is been a continued substantial appreciation of the dollar. And we don't have our year end rates yet, but if we...
if these rates kind of sustain through the end of the year, we're likely going to see that in Q4. It all depends on what happens in the quarter Michel.
So, 2009... this is basically which you try to true up, where your debt is at a point in time.
So 2009, if the rates stayed where they were we wouldn't have this impacts. It's non-recurring in that sense.
But Q4, as we said today, knowing how much the dollar is appreciated, we do anticipate sometime as an impact.
Michel Morin - Merrill Lynch
Great. Thanks very much.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
You're welcome.
Operator
Your next question comes from Scott Schneeberger with Oppenheimer.
Unidentified Analyst
Hi, good morning. This is Ella for Scott.
First just to follow on the previous discussion, can you just help us understand a bit more on the $60 million on cash charge for on the ForEx impact? I mean your EPS has never been so volatile before.
So is it purely because of this ForEx fluctuation we see on the market, or is there any changes on your debt structure or like all your accounting policy? So, just help us to understand a bit more on this?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Yes, it is entirely related to $16 million charges, entirely related to changes in FX during the quarter as we mark our debt to market. And, the reason that is significant in the quarter that there just been record changes in currencies, its unprecedented strengthening of the U.S.
dollar. If you...
as I mentioned in the response to the last question, we've actually seen benefits on this front going back over last couple of years. They just didn't occur all at once.
They kind of burden over a period of time, so that... we expect to see some impact on other income and expense related to foreign currency changes.
It is just unusual in this quarter. It has nothing to do with changes in the accounting perspective; it's just related to the FX when we saw.
Unidentified Analyst
Okay. And would you consider, since like hygiene, if your continuous to see such big volatile?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
We do align our assets and our liabilities in international markets. We would have seen much more significant effect on something like other income expense if we didn't have that in place.
And so we do leverage that. There is little we can do other than what we've already got in place which is a natural alignment of expenses and revenues in our business to impact the recorded revenue on the OIBDA FX from accounting point of view, we're not going to be hedge cash flows.
And as you know, hedge is really on that front are just sort of a planning tool, just to lay kind of eventual changes in the tax rate. So, we're...
we appreciate your patience as we work through some of this volatility. But the dynamics you're seeing are related to some unprecedented movements in currency
Unidentified Analyst
Okay. Thanks for that color...
Unidentified Company Representative
We have to move to the next question, we have a queue here, and we're running over so I'm going to ask we've actually moved to the next question.
Operator
Your next questions comes from Franco Turrinelli with William Blair
Franco Turrinelli - William Blair
Hi, Bob and Brian how are you? Bob, this is I think mainly for you, I mean, I'm so interested in thinking through, If we pack out at a couple of these long term impacts on internal growth, so lets back out the fuel surcharge as special projects.
What we've got as a business that's basically generating 9% internal growth across every single aspect of the business. And in a sense, I'm sort of struggling to reconcile that with your comment, that you're assuming pressure in market.
I mean this is an extremely impressive performance. And I guess what I'm asking here is; where is it really that you think you're seeing this weakness, because I don't think the results reflect much weakness or should we be thinking of the business now having a slight little growth that's significantly higher, in this high single-digit internal growth?
Bob Brennan - President and Chief Executive Officer
Franco, I think it's more we need to just trying to be very balanced in presenting our expectations; we have very high expectations for the performance. We're not seeing a lot of effect on the business.
We do see the pressure our customers are on there. But the point I try to make is we think, we can manage through this and achieve the high expectations that were set for a year end for ourselves.
The fact of the matter is, we believe that business is performing well; we can continue to manage strong performance and strong internal growth. But there is pressure on complementary revenue.
We just have to meet that pressure by focusing on more short-term return on investment for our customers. And we can do that, but it requires tighter management.
I didn't mean to set a lower expectations, we have very high expectations. But there is more pressure than there was just a quarter ago.
We think we can respond to it, we think we can manage it and stay on target.
Franco Turrinelli - William Blair
It certainly looks like it. Thanks, Bob.
Bob Brennan - President and Chief Executive Officer
Thanks, Franco. Thank you.
Operator
Your next question comes from David Gold with Sidoti.
David Gold - Sidoti & Company
Hi, good morning.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Good morning.
Bob Brennan - President and Chief Executive Officer
Good morning, David.
David Gold - Sidoti & Company
Can you give a little more color on... your comments on the fourth quarter variance.
You just alluded to not all of that presumably coming from currency. Can you talk about how much of it is coming from sort of other business factors and, just building on that?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Yes, sure. Now that we try to highlight a few...
and this was trying to relating it to what would have been implied in our last outlook. We obviously had a very good Q3.
As we went up to add our Q4 outlook there were some... we had anticipate some projects that benefited Q3 result in North America, kind of recurring through to the back half of the year and they heard of it sooner.
So we update our forecast for that. Papers moderated, it came down, it's now in the mid 180 range and so we are anticipate...
that's actually are going to be a bit lower it was the year before. And so, we updated that outlook and we're also...
we highlighted that at I Day David that we're doing the big real state rationalization program in the UK and as part of that we're going to be making some decisions around some buildings and we're going to have dilapidations charges that were going to have incur. So, I was just trying to highlight if you...
anticipating a question as to why we're not seeing more flow through from the Q3 and we just had some factors that more on our Q4 outlook a bit.
David Gold - Sidoti & Company
Got you. Got you but just curious again...
if maybe there's a better way to quantify sort of the difference. How much of it is currency and how much of it is business issue?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Well, we did try to isolate the currency impact for you. So what you are seeing in net, net is you have a non-currency number there.
David Gold - Sidoti & Company
Got you. Fair enough.
Thank you.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Thanks David.
Operator
Your next question comes from John Healey with FTN Midwest.
John Healey - FTN Midwest
Good morning, guys.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Thanks John. We'll have to make this the last question everybody.
John Healey - FTN Midwest
Question... Just a big-picture question on your financial services customers.
Obviously we're seeing some contraction in the number of players in this space. I'm not so much concerned about volumes but I was hoping to get your thoughts on pricing and how you see some of your, assuming your customers kind of combined with one another.
What that does to the pricing of that business and if it's meaningful enough to have an impact on margins for you guys?
Brian P. McKeon - Executive Vice President and Chief Financial Officer
It will have an impact overtime. Generally with our financial services customers especially the largest ones we have long-term contracts, where to the extent that we have any flexibility that will be exercised over a very long period of time.
This is actually an area where I'd spent a lot of time right now, John and the fact that they are under intense cost structure and we can help them by understanding what information that they are... does that some can be disposed of.
How they can drive out some cost from the litigation that they're facing right now through our e-discoveries services. And, this is also when we do a lot of transactions day in and day out, we have a lot of people that face the customer on these accounts so that we're be in particularly visible and empathetic with them to really response to their needs to derive cost to equation.
So, I hadn't to take to say that net, net it's more upside and downside, because... for obvious reasons relative to the state of the sector.
But, definitely we're planning the business and that's how we're managing is that there that we are expecting to drive more upside than any downside factors that come from consolidation et cetera. So, we feel we can do a good job for our costumers there that we do, do a good job and they appreciate the help quite frankly.
John Healey - FTN Midwest
Okay, great. And there is just one follow-up question your thoughts on cash flow you talked about internally maybe a little bit more conservative on some of your expenditures any change in terms of higher organic deploying cash flow and then you maybe change in and have some pursuing acquisitions opportunities over there maybe the next 6 to 12 months or so.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
We would be in really disciplined in this timeframe. But, we make sure that we understand our opportunities to expand internationally individually and we keep that landscape in mind but right now we're been particularly disciplined for reasons I'm sure you can understand.
John Healey - FTN Midwest
Great. Thank you, guys.
Brian P. McKeon - Executive Vice President and Chief Financial Officer
Thank you all for joining us on the Q3 earnings call. We'll speak to you in next quarter.
Thank you.
Operator
Thank you. This concludes today's conference call.
You may now disconnect. .