Feb 26, 2009
Executives
Stephen P. Golden – Vice President, Investor Relations Robert T.
Brennan – President & Chief Executive Officer Brian P. McKeon – Executive Vice President & Chief Financial Officer
Analysts
Ashwin Shirvaikar – Citigroup Vance Edelson – Morgan Stanley Andrea Wirth – Robert W. Baird Kevin Mcveigh – Credit Suisse Andrew Steinerman – JP Morgan Edward Atorino – Benchmark Franco Turrinelli – William Blair
Operator
Good morning, my name is Vanda and I will be your conference operator today. At this time, I'd like to welcome everyone to the Iron Mountain fourth quarter 2008 earnings webcast.
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) Thank you. Mr.
Golden, you may begin your conference.
Stephen Golden
Thank you. Good morning everyone and welcome to our 2008 fourth quarter and full year 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 will open up the phones for Q&A.
For those of you here in Boston, we will be presenting at the Robert Baird 2009 Business Solutions Conference at the Four Seasons Hotels later this afternoon. 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 2009 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, and our most recently filed 10-K for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.
As you know, operating income before D&A or OIBDA, free cash flow before acquisitions and investments and other non-GAAP measures 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 various non-GAAP measures to the appropriate GAAP measures as required by Reg G at the Investor Relations page of our website, as well as in today's press release.
With that, I would like to introduce our CEO, Bob Brennan.
Robert Brennan
Thank you, Stephen. Good morning and welcome to our year-end conference call.
The format of today's call: I’ll cover our business performance in 2008 as well as the progress we made against our strategy and a few remarks on how I feel about this coming year. Brian will then review details of our financial performance and provide guidance for 2009.
And afterwards we will take Q&A both Brian and I. But before I get into 2008, I want to [share] some key messages with you.
First and foremost the business at Iron Mountain is doing very well. Our business is performing, the team is doing a good job, the core business itself is particularly strong and continues to strengthen.
We are managing well and improving both capability and execution and this is evidenced by the fact that we hit our 2008 targets and we expect to produce solid results in 2009, where we improved our cash flow and balance sheet and advance against our strategy with significant progress across all of our business segments, and I’ll touch up on that in a few minutes. Now we are experiencing some pressures from foreign exchange, paper commodity prices, which drop dramatically in the back half of last year, as well as customers deferring on some purchases with our complementary revenue.
Despite those pressures though we expect solid performance in 2009. Now let’s drop back and take a look at 2008.
First of all, we had a good Q4. OIBDA is at the high end of the range.
We did expect pressures on complementary revenue, which represent about 14% of the total revenues. There were impacts from the completion of two public sector projects as well as lower paper prices and project sales customers did defer in some cases and continued to defer in some cases.
So then the question is how did we hit the numbers? First revenue.
Core revenue growth was solid across all of our business units and remained solid. Just as reminder, core revenues are the bulk of our revenues.
In other words they are the other 86%. These results are driven in large part by North America.
Our North American business just keep in better execution as well as realizing value for the services we provide in the market where we have significant competitive events. Core revenues for quarter was 9% with solid 7% internal growth.
So in addition to solid revenue growth, we also hit the numbers through disciplined execution against control and costs. We are very careful about which costs we grow, which investments get prioritized, we’re also been very careful about driving efficiency into our organization and in some cases make targeted reductions because we’ve realized inefficiency.
This is all a function of performance management that has been taking place and then a primary focus of ours for the last few years. We have been increasingly disciplined about how we managed the business and it’s showing in our results.
For 2008 revenue was up 12% and OIBDA was up 13%. Capital efficiency improved with CapEx at 10.8% of revenue excluding real estate and free cash flows are 182 million before real estate and acquisitions, well ahead of our original expectations.
Iron Mountain is financially stronger entering 2009 with our leverage down at 3.8 times and hasn’t been that for a long time. Our cash capacity stands at $775 million and we have no debt obligations until 2012.
In other words, business performed well. Our team is doing a good job and our value proposition despite all the pressures in the economy continues to resonate with our customers, is driven by driving that cost and driving out and reducing risk and that’s particularly helpful in these times.
So let me talk about progress against our strategy in 2008. Many of you know we’ve employed a consistent time tested three-phase approach.
And what I want you to know is that and what I’m really trying to bring for life in the next few minutes is that we needn’t compromise on our strategic agenda hit our target last year. And we are not going to compromise on it this year.
We believe we can walk into them at the same time that we can perform and pursue a solid strategic growth agenda. So the three phases that mentioned - for those of you that have been following these notes, Phase 1 is build the platform and market some products.
Phase 2 is build distribution into those markets and Phase 3 is not capitalizing on the business driving growth and returns. So let’s start with the North American Physical Business.
It is a great business and it’s squarely in Phase 3 driving growth and returns. We do as I mentioned before, we have significant competitive advantage here.
We made solid progress strengthening this business. While we improved returns but we remained growth focussed.
Some areas of growth for us where I’m going to talk about some relatively small businesses relative to the market opportunity, where we have made great progress and have strong potentials. Our Document Management Solution Business.
Think about this as taking the box business and getting to what’s inside the box and helping customers with their workflow from imaging to physical to digital conversion. This is the business where we’ve dedicated focus.
We tremendously increased our sale capability as well as our service delivery capability in the past year and we are very bullish about the business over the short, medium and long term. Our healthcare focus, obviously this is an exploring market with the proliferation of records in the healthcare segment and just the math that occurs between physical and the digital records and we can help customers across that spectrum.
I’m taking over a file room for a hospital to doing their medical image archiving. Relatively small business for us today, but we see a large market opportunity.
And in the government sector and just a last few years, we’ve been very much focussed and provided a dedicated team against selling to the government as well as helping our customers who had to be compliant with federal records because days sales is up and with invested significant capital against this final touch in a few months relative to our facilities, with small dedicated teams, small business today we see great growth potential going forward. So this is North America, while we are producing strong return setting long lines into the future.
In terms of returns, the same story often been for a few years i.e. productivity focussed on our real estate, network focussed on our transportation network, our workflow we’re doing a good job here.
We go market-by-market. We’re making steady progress that is sustainable for years to come in driving more efficiency at our business and we continue to get value for the services that we provide.
And we’re pleased with the progress we’re making on that front. So net-net North American Physical, great business managed by a great team.
I expect solid performance from that team in our business this year. Let’s move to International.
International is a key component of our growth agenda. This is a business that’s been developed through acquisitions, joint ventures as well as organic growth.
So, we are really in all three phases of the business. Now International is behind North America in returns but it’s a business with great potential where we believe we can pursue North American like return over time.
The key story is that we did consolidate leadership in this segment in the last year and really upgraded management. Marc Duale is now in charge of International Asset segment and we upgraded management across the continent of Europe with our country managers over the last couple of years as well as in our Australian business.
We’ve also had a great deal of success building joint ventures internationally. If you look at some of our better performing businesses in Chile, Peru and Mexico, these came from ex-joint ventures where we’ve done 15 events, eight have resulted in acquisition.
Those eight are performing very well. And today we’re incubating joint ventures with very strong partners in Russia, China, Turkey, India and other emerging economies where it takes a long time.
These are flywheel businesses. Building our Storage business takes a long time but we believe we can establish the same competitive advantage we have in North America and build a very strong business with a very long haul.
We’re also continuing to build out distribution capability, having invested in sales capability in continental Europe where we are seeing strong benefits from that. And in our largest businesses, Australia and U.K., it is very much like North America.
It’s about driving growth and returns and we follow a similar playbook. In Australia and U.K., we bought lower return businesses but we know we can improve those returns by focusing on revenue growth and penetrating our customer base, driving basically up selling and cost selling our existing base and to cost and performance management that were familiar with the playbook and we know the potential in these businesses because we see that in our Latin American businesses, which drive very high growth and returns and of course we see that in our North American business.
So, we expect improved incremental financial performance and scale out of International as we go forward. So, now if I can just turn our attention to Digital.
Digital is about 7% of our business today and we expect to increase that overtime. But we are still building up the platform.
There are three legs to this platform. There is data protection, also known as backup, archival and eDiscovery.
Together that's a platform for providing digital storage and service where we are the leader and with attention created the category. In building out that platform we announced a few key products in the past year, one through acquisition, which was the acquisition of Stratify.
This is a great acquisition for us. It's a very hot market.
It's a wonderful team. We had no turnover and they performed admirably against their targets.
We’re very pleased with the acquisition of Stratify and what that can do for us going forward. We also announced the product that we previewed for you on Investor Day called Virtual File Store.
We announced it this week. Think of it as a box, this is all over again.
We are going to IT organizations announcing give us your inactive data. It doesn’t belong on your primary computer systems.
We can store it more securely and more cost effectively than you can and I don’t want people who don’t want to spend money on capital expenses, that’s resonating. We are very proud about the potential of the product.
We also built data distribution capability during the past year having announced significant partnerships with Microsoft where they came to us as the experts for doing cloud recovery because we are the leaders in digital storages and service. So we are the cloud recovery offerings to their data protection management product.
McKesson and HP use us as the service provider for their medical image archive technology. IBM partners with us through their FileNet Group for perspective record management.
And it's again that’s where we have the brand, that’s where we have the expertise in the permission with our customers. And within our eDiscovery platform with Stratify we are getting very significant traction through strong partnerships with TWC and Navigant.
But it’s our brand and it’s our expertise that has these industry giant seek us out. I want to make no mistakes about the tough times that is on store for us.
Sales cycles are longer. People are scrutinizing ROIs.
Customers are delaying whenever they can. It’s a hard time to be in the technology business.
But one should remember that most of our business is recurring and already under contract. We have a recurring business model and our value proposition is around saving money.
So we feel very comfortable with the shakeout that’s going to occur in this stage. We are going to be a net beneficiary of it and there is going to be a lot shakeout to the small firm just unable to sell our stock.
So, if we backout against that, Digital had a very good year making strategic progress as did International, as did our North American Physical Business. Let’s talk a little bit about 2009.
As we head into 2009, we remain focused on the strategy that got us here. But there are some key points that I want you to consider.
First of all, we are tracking to plan. Iron Mountain is also a good start against our growth and productivity agendas across all of our business segments.
We expect to hit our targets despite significant pressures on the complementary revenue that 14% of our revenue where we are subject to lower paper prices. There is pressure on project revenues and customers are hunkering down as it relates to making discretionary investments.
We’ll also see pressure on our reported results from foreign exchange, but this does not affect the underlying strength of our business. Business is strong and that strength is reflected in our targets of solid core revenue growth and even help your profit gains.
Let me just talk for a minute about how we are managing in this environment. We are being very disciplined about where we grow costs, rich growth and capital investments we make and calibrating our spend to reflect both pressures in the market as well as the opportunity.
We are pushing the team hard and they are responding. So while we are managing the business tightly making sharp choices, we’re also very much committed to investing against our strategic agenda.
Key initiatives this year will include advancing our document management services and solutions business. We have unique competitive advantage here.
We already have the facilities. We have got to be at the customer’s records.
We have the people who have made the investments, so we have a unique competitive offering here and we will scale that business aggressively. We will also focus on scaling digital users.
They just pointed out through the partnerships that I mentioned. We have permission to become the de facto offsite store for businesses.
And we will focus on strengthening our global footprint both through improving returns in established markets like the U.K. and increasing growth capacity in markets around Latin America and Continental Europe.
We will also remain sharply focused on enabling long-term return improvement through smart concentrated investments in our core business. We’ve really continued to drive standardization of workflow, including a relentless focus on securing our customer’s information assets.
We’ll be focussed on realizing value to the investments we make. So in closing, I just want you to know that we are very pleased with the fact that we hit our targets and advanced our strategy in 2008.
And I want you to know that I’m confident and the team is confident that we can deliver solid performance like the current [phase] and build value for the very long term. So with that if I could just turn it over to Brian McKeon, our Chief Financial Officer.
Brian?
Brian McKeon
Thanks Bob. Good morning everyone.
Q4 was another solid quarter for Iron Mountain, highlighted by healthy internal revenue growth and strong OIBDA gains. Storage revenues, which comprised 55% of our total revenues and are a key financial driver, grew 8% organically in the quarter.
Core service revenues representing another 31% of revenues posted 11% internal growth. As expected, the record recent strengthening of the U.S.
dollar did lower reported revenue and OIBDA growth in Q4. Similar to Q3, unusually large exchange rate changes also recorded as to recognize charges in other expense in our booked tax provision, which lowered our reported EPS by about $0.20 per share.
These factors however don’t alter the fundamental suaveness of our business, which performed well throughout the year. For the full year, we delivered against all of our financial objectives posting 8% internal revenue growth, 13% comparable OIBDA growth and significant improvements in capital efficiency.
Today we will review our quarterly results and provide an update on our full year 2008 cash flow performance, capital spending and our current debt position. We will also provide an update perspective on our 2009 guidance.
Let’s turn to slide four, which highlights the key messages from today’s review. The first key message you should here today is that we continue to drive solid business performance, reflecting the strength and resiliency of our business model.
In Q4 we delivered 9% internal growth in combined core storage and service revenues. We also drove a 11% comparable growth in OIBDA in spite negative foreign exchange impacts and pressures from lower recycled paper pricing.
We continue to execute with discipline and leverage strong Q4 performance to deliver against our 2008 financial objectives. Revenues exceeded $3 billion for the first time in our history and we delivered 8% internal revenue growth for the full year, solidly within our forecasted range.
OIBDA finished the year at $783 million at the high-end of our guidance, we originally issued a year ago, 13% year-on-year growth in OIBDA excluding asset gains and losses was supported by strong gains in gross profit and tight cost controls. We also strengthened our liquidity and leverage ratio this year.
At year-end we had over $775 million in total liquidity including more than $500 million of availability under our revolving credit facility, which is supported by well-diversified bank group. We ended the year with a consolidated leverage ratio of 3.8 times OIBDA moderately below our long-term target range, reflecting our heightened focus on cash management.
We have a free cash flow positive business before acquisition, so these positions should continue to strengthen in the absence of significant acquisition activity. We intend to build on our financial progress in 2009 with goals for solid underlying operating performance.
Our outlook in corporate expectations for continued solid momentum in our North American business where we are driving strengthened returns to enhance focus on execution. As noted on our last conference call, the unusual strengthening of the U.S.
dollar in recent months will pressure our reporting results in 2009. At current rates we expect foreign exchange will lower reported growth by about 7%.
Large recent declines in commodity such as recycled paper will also constrain near-term results. We’ll review our updated 2009 guidance in more detail today, isolating impacts from these factors to highlight the underlying strength of our financial outlook.
Let’s begin with the review of the details of our Q4 performance starting with a look at our revenue growth performance in slide five. Slide five breaks down our overall revenue growth.
It shows internal growth by major service line as well as the impact of acquisitions in foreign exchange. As a remainder, we removed the 2007 and 2008 revenues associated with the divested product sales business from our internal growth calculations.
Overall, we drove solid growth in the quarter although reported revenue gains were constrained by negative foreign exchange rate impacts and lower benefits from acquisitions. Internal revenue growth for the quarter was solid at 7%.
As noted core internal revenue growth was up a strong 9% supported by 8% storage growth and a 11% core service growth. Storage gains were solid across our key businesses.
Strong core service growth was supported by gains in North America including benefits from fuel surcharges and strengthened pricing. Overall internal revenue growth gains were moderated by 6% decline in complementary revenues.
As expected, we saw pressure in Q4 due to the completion of a major European public service contract over the last year that resulted in $5 million reduction in revenues in the quarter. While recycle paper prices also impacted complementary service revenue in the quarter by approximately $4 million.
Together these factors caused a 9% negative impact to Q4 complementary revenue 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.
As we noted in the past, complementary service revenue, which represents about 14% of overall revenues can fluctuate over time, given fluctuations in demand and timing for special project activity as well as variations in factors such as recycled paper pricing. Despite these impacts, our overall internal growth rates remained solid throughout the year and we delivered against our full year internal growth goals.
Slide six compares the P&L results for this quarter to Q4 2007 and brings down our revenue growth by business segment. As shown here, we delivered solid OIBDA gains despite pressure from foreign exchange and lower complementary revenues.
Reported revenues reached $753 million in Q4, up 4% supported by solid storage growth across our business. On a constant dollar basis, revenues grew 8% while OIBDA grew 13%.
Our largest segment, North America Physical posted strong core revenue internal growth of 10% and 7% internal growth overall. We saw solid growth across our records management and data protection and secure shredding product lines.
Overall growth was supported by solid storage gains and strengthened core service revenues. These gains were offset by declining recycled paper prices and anticipated softness in more discretionary areas such as special projects and fulfillment revenues.
Our International Physical business reported internal growth of 4% supported by continued strength in our Latin American business and solid storage internal growth in Europe As expected, we saw declines in complementary service revenues in Europe as the second major project we have been speaking was concluded in the third quarter. These declines reduced International revenues by $5 million or about 3% in the quarter.
In addition, significantly weakened foreign currencies reduced our reported results in the segment by approximately 11 percentage points. Our Digital segment also drove strong revenue growth with 26% gains overall supported by a 11% internal growth and continued solid 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. Operational gains in our North American Physical segment drove improvement in gross profit.
Gross margins were up a 150 basis points for the quarter, compared to the same prior year period, supported by productivity gains and improved storage gross margins in North America. Gross margins also benefitted from the sale of the low margin data product sales business.
Year-on-year SG&A growth was 3% in the quarter slightly below the rate of revenue growth. SG&A cost growth moderated as expected in the fourth quarter reflecting our tight focus on execution and cost control.
OIBDA, which grew 9% on a reported basis to $199 million in Q4 of 2008, included $3 million of asset write-offs related to building moves in North America. Note that our Q4 2007 results included a $1 million net gain on asset dispositions.
On a comparable basis, excluding asset gains and losses, OIBDA grew 11% in Q4 2008 compared to Q4 2007. Depreciation was $64 million and amortization was $9 million for the quarter.
The year-on-year increase in D&A was driven primarily by amortization related to the Stratify acquisition completed in December 2007. Operating income was $126 million for Q4, up 10% versus the prior year, in line with our OIBDA gains.
Slide seven bridges our Q4 operating income and net income and EPS results. While we drove solid operating income gains in Q4, our net income and EPS were negatively impacted by charges related to large recent changes in foreign currency exchange rates.
As noted operating income for that quarter was up 10% to $226 million, supported by strong gains on the gross profit line in moderating growth and depreciation, reflecting tight capital controls and the absence of acquisitions in the quarter. Our Q4 interest expense was $57 million, down 3% from Q4 2007 due primarily to decreases in our net debt and weighted average interest rate.
These gains were offset by impact of other expense in our effective tax rate from changes in FX rates since the end of the third quarter, which reduce net income by $40 million, or $0.20 per diluted share in Q4. As a result, we reported net income for the quarter of $1 million or $0.01 per diluted share.
As we discussed in our last earnings call, large fluctuations in foreign currencies during a quarter can result in meaningful accounting effects as we mark our forward contracts in debt to market, and record the appropriate tax effects from these changes. In Q4, FX changes drove us net $16 million charge in other expense.
We also recorded a $24 million tax provision on these amounts, reflecting both foreign currency gain and losses incurred in different tax jurisdictions. As noted on our last call, well large changes in FX can impact our reported results.
Two economic impacts to our business are mitigated by some key factors. First as a service company, our costs are matched with our revenues in local currencies.
We’ve also aligned our international assets and liabilities in the same currency with international net asset positions at 90% hedged. Finally, our International businesses are funded with local currency cash flows and debt financing.
As such we are not exposed to reliance and repatriation of funds from our international operations. We’ll continue to highlight the discrete impact from FX changes and reporting our results to reinforce the strength of our underlying business performance.
In Q4, the impact of foreign currency rate changes increased our effective tax rate by about 60 basis points. Discrete items such as FIN 48 interest addition to tax reserves and other adjustments also added in that 5% to our effective tax rate in the quarter.
For the full year, our tax rate before the impact of foreign currency rate changes and other discrete items was 38%. We are estimating our tax rate before the impact of foreign currency rate changes and other discrete items for 2009 to be approximately 39%.
Let’s now turn to slide eight to look at our full year performance. Our solid Q4 performance supported strong full year results at the high-end of our original full year goals for revenue and OIBDA growth.
For the full year, we achieved all of our stated financial goals: 10% to 13% revenue growth; 10% to 14% OIBDA growth excluding asset gains and losses and improved capital efficiency. Balance growth across our key businesses and service lines drove solid overall revenue gains of 12% and internal growth of 8%.
Acquisitions added another 3% and year-over-year favorable currency changes added about 1% to revenue growth. OIBDA growth of 13% excluding asset gains and losses were supported by 14% growth in gross profit reflecting our focus on operational execution, particularly in North America.
Net income and EPS declined to reflect the impact of foreign exchange rate changes or other expense in our effective tax rate. Other expense was $31 million in 2008 versus $3 million in 2007.
Our effective tax increased to 64% in 2008 versus 31% in 2007. Combined foreign exchange impacts and the related tax provision reduced net income by $69 million, or $0.34 per diluted share in 2008.
Also included in our 2008 results is $0.02 per share impact of net losses on our asset dispositions. As a reminder, our 2007 results benefited approximately [$0.80] per share from net gains and asset dispositions and a lower effective tax rate due to the impact of foreign currency rate changes and other discrete items.
Absence of these impacts we drove solid underlying profit growth in 2008. It’s important to note that the impact of foreign exchange changes on our tax rate were primarily non-cash in nature.
Let’s now shift to reviewing drivers of our cash flow performance, which improved solid in 2008. Slide nine summarizes our capital spending for the year compared to 2007 full year results.
We made significant progress against our capital efficiency growth in 2008 with CapEx before discretionary investments in real estate representing 10.8% of revenues. This is down 270 basis points from the comparable measure in 2007.
Our total CapEx for 2008 was $373 million including $44 million through real estate. Semi controls on our capital spending and increased asset utilization rates were key drivers of improved capital efficiency in 2008.
Additionally, we deferred a portion of our data center expansion into 2009. We remain focused on aggressively driving efficiencies on our capital spending while supporting key growth initiatives and projects that help to drive long-term return improvement.
We’ll review our updated projections for 2009, which looked to extend this solid progress as part of our guidance discussion. Let's now move to slide ten and look at our free cash flow for the year.
Slide ten highlights our cash flow performance for the year compared to 2007. For 2008, free cash flow before acquisition and discretionary investments in real estate was a $182 million well above our original forecast range.
The year-on-year increase in free cash flow is supported by solid OIBDA growth and tighter control over capitals expenditures - capital expenditures, reflecting the benefits of our disciplined approach to managing the business. Also included in the cash flows from operating activities is a $24 million realized cash gain in our British pound-hedging contract that rolled over on the fourth quarter of 2008.
Relatively low levels of cash tax payments supported strong cash flow this year. Cash paid for taxes in 2008 was $44 million as we benefitted from the use of past NOLs and a change in U.S.
law that allowed for accelerated depreciation on most U.S. property additions.
In 2009, excuse me, we expect our cash paid for taxes to be approximately $50 million to $55 million including the benefit of continued accelerated depreciation provisions contained in the recently inactive stimulus package. We discussed our projected free cash flow for 2009 in the outlook section of today's presentation.
Now let's turn to slide 11 for review of our current debt and liquidity position. We continue to strengthen our balance sheet and liquidity.
In terms of our debt portfolio we ended 2008 in a very strong position. Our weighted average interest rate is down 7% and were 80% fixed.
Maturity is now at 7.2 years with no meaningful repayment obligations until 2012. Consolidated leverage at year-end was 3.8 times below the low-end of our target range of four to five times OIBDA and well within our 5.5 times covenant limit.
As we’ve discussed in the past, our business will naturally delivered we choose in for acquisitions. With the modest level of acquisitions spending in 2008, in the benefits of our just when focussed on operating cash management, we saw significant improvement in leverage ratios and liquidity this year.
We currently have over $275 million in cash and $500 million in additional borrowing capacity. As Bob mentioned in his opening remarks, we’ve a very strong balance sheet and we're well positioned in terms of cash and financing capacity.
While we maintain a strong operating outlook, we anticipate in maintaining a more conservative approach to cash management in the current environment. This concludes over review of Q4 and full year 2008 results.
In summary, we’re very pleased with our results this year, both operationally and financially. Operationally, we’re particularly pleased with our progress and strengthening our core North American business, which is the engine for our financial performance while expanding our international and digital growth platforms.
Financially, we delivered our financial goals this year in a tough environment while strengthening our balance sheet and cash flow performance. Let’s now turn to page 12 and discuss how we intend to build on this progress in 2009 to review of our financial guidance.
In terms of our guidance for 2009 there are three key methods you should hear today. The first is that we intent to sustain solid internal revenue growth in 2009 supported by 8% to 9% core internal revenues gains.
As demonstrated to our recent performance, our recurring storage revenues remain strong and we believe we can sustain solid quarter service revenue growth in 2009. We also intend to drive strong comparable OIBDA gains at or above the rate of revenue growth.
Our objectives in 2009 are of 8% to 13% growth in OIBDA on a constant dollar basis, building on our solid 2008 results. As we’ll discuss some more detail later about 3% of this growth is related to certain of our vehicle operating leases now being classified as capital leases upon renewal.
These objectives reflects the solid progress we’re driving across our business including benefits from pricing and productivity initiatives on our North American business, and a discipline approach to cost management across the company. Finally, well our underlying business fundamentals remain solid we do expect pressure on our reported results from significant recent changes in foreign exchange rates and recycle paper pricing.
We estimate that FX changes will reduce reported growth rates by about 7% in 2009. Commodity prices, which declined dramatically in Q4 will add pressure to complementary revenues and lower our internal growth rate in 2009 by about 2%.
Let’s review our outlook in more detail starting with the breakdown of our revenue growth guidance. Table on slide 13 shows our expectations for internal growth and total growth in 2009 including impacts from FX and acquisitions.
In terms of our core revenues, which represent 86% of our total revenues currently we’re targeting sustain strong 8% to 9% internal growth in 2009. We expect our core storage trends to remain solid across our business.
We also expect benefits in 2009 from efforts we’ve been advancing to improve our pricing for storage and for services, which is adding support to our growth outlook. We believe the core internal revenue growth is the best measure of the underlying health of our business, and we expect to sustain solid performance on this front in 2009.
While core revenues will remain strong, we’re planning for pressure on complementary revenues, which will constrain our overall internal growth to 5% to 7%. This outlook is consistent with our preliminary outlook for 7% and 9% growth showed at Investor Day adjusted for the record downturn in the recycle paper pricing experienced since October.
We estimate the changes in commodity prices will reduce our overall growth rate by 2% this year. The 10% to 20% projected decline in complementary revenues also factors and impacts from the recent completion of a large public sector project at Europe and expected pressures on more discretionary revenues in the current economic climate.
To put this in context, the 10% to 20% decrease in complementary revenues equates to approximately $40 million to $80 million on revenue reduction before our $3 billion accompanist. As we noted many times in the past, complementary revenues do fluctuate in our business but we want to reinforce that this represents the smaller part of our overall revenue base.
Combined with the estimated 7% impact from the record strengthening of the U.S. dollar in the second half of 2008 we’re projecting reported revenues to be flat to down moderate in 2009.
Let’s spent a moment reviewing the impact of commodity prices and foreign exchange impacts, as these effects will be greater in the first three quarters of the year. As we discussed we’ve seen some dramatic changes in factors such as recycle paper pricing and foreign currency exchange rates in recent months.
At current rate these factors will combined to lower reported revenue growth by 9% to 10% in 2009 with greater impacts in Q1 through Q3. In terms of recycle paper pricing the October to December 2008 timeframe so the fastest EPS decline in the reported history in the paper market.
Market pricing for sorted office paper drops from levels and excess of $200 per tonne from much of last year to below $90 per tonne recently. As shown in the left hand chart above we’ve generated over $90 million of revenue from recycle paper sales last year during periods on average market pricing was an excess of $200 million per tonne.
A current rates we expect that commodity price changes including lower fuel surcharges were lower overall revenue growth by about 2% this year with greater impacts on the first three quarters. Foreign exchange changes will also have a more significant effect on a reported growth in Q1 through Q3 with negative impacts in the 8% to 9% range.
It’s important to reinforce that FX movements don’t impact the underlying fundamentals of our business. As a service business our revenues in cost are aligned international markets and we continue to target solid underlying operating performance.
As we report our performance in 2009 we’ll enhance our use of constant dollar growth rates to highlight or underlying operating trends. With now turn to slide 15 to review our internal growth projections by business.
Slide 15, highlights our expectation for internal growth rates across our three business segments. For our North American physical segment, which finish the year within 8% internal growth rate, we’re expecting 2009 internal growth to be in the 5% to 7% range.
This outlook reflects consisting performance in core revenue growth is supported by solid toward revenue gains. This gains will be moderated by some of our complementary service revenue including impacts from lower recycle paper pricing.
For our international physical segment we are projecting internal growth in the 46% range. 2008 was a good year in a international supported by solid in growth rates core revenue partially offset by pressures and complementary services due to the completion of two large projects was to be working through some comparisons do these project revenues in early 2009, which will lower internal growth rate for the year by 2%.
Similar to the North American business we’re targeting strong core revenue growth rates in our international operations building in our solid moment in these markets. Finally, which respect to worldwide Digital segment we’re targeting a internal growth rate of 7 or 12% this year.
What we expect to solid growth contribution from our expanding – business we are calibrating our new business growth expectations for digital in the current environment. Given pressures on customers IT budgets we’re planning for software performance in areas such as software license sales contributing to our moderate growth outlook.
Slide 16, corporate these projections into our overall guidance for 2009. Slide 16 summarizes our full year 2009 in Q1 outlook.
As noted we are targeting 5% to 7% internal revenue growth overall with flat to moderate declines in reported revenues reflecting the estimated negative 7% impact on foreign exchange changes. With respect to OIBDA we are targeting 8% to 13% cost in currency growth.
In 2008 primarily due to the softening vehicle resale market the residual values are our vans and trucks decline to a level where certain vehicle leases that previously met the requirements to considered operating leases are now classified as capital leases or bond renewal. As a result included in OIBDA in 2009 is $21 million of reduced rental expense.
Offsetting the reduction in our rent expenses or increases in depreciation and interest expense. As such there will be limited impact from this change to net income.
Our capital expenditures of approximately $420 million include $20 million for the – triangle real estate project in London and $12 million for new capacity to store compliance have records in the U.S. which is a key growth initiative for us.
For the first quarter we are projecting revenues of $710 million to $730 million and OIBDA of $170 million to $180 million. We expected greater pressure on reported results from foreign exchange changes and year-on-year complimentary revenues pressures in Q1, which is factored into the dollar.
Turning to slide 17 you can see our expectations for the P&L below the OIBDA line for the full year 2009. As discussed both OIBDA and D&A plus interest have been increased by approximately $21 million as a result of our vehicle leases now been classified as capital leases.
We are expecting our structural tax to be 39% for 2009. As noted we expect this to continue variability in the effective tax rate relate to FX changes and other discrete items such as FIN 48 interest, tax order activity and changes in tax loss or our tax reserves.
As discussed earlier FX changes impacted our 2008 EPS by $0.34 per share. We also saw at $0.02 per share impact in 2008 from net losses on asset dispositions.
Our expected 2009 EPS assumes no impact on future FX changes discrete tax items are asset dispositions. In terms of free cash flow we intent to build on our strong 2008 performance with goals for free cash flow before real estate acquisitions of $130 million to $170 million.
In summary 2008 was a solid year as disciplined management and strong execution draw the successful achievement of our financial objectives. Our business fundamentals are solid and we expect to build on those results in 2009.
We’ve a strong balance sheet and we’re very well positioned from our liquidity perspective to fund our objectives. Thank you and we’ll now open the phones to take a questions.
Operator
(Operator Instructions) Your first question comes from the line of Ashwin Shirvaikar with Citi.
Ashwin Shirvaikar – Citigroup
Hi guys. I wanted to ask about pricing on the storage side.
Are you seeing any pushback on getting these 32% effective price increases in this environment and to what is that in your internal growth guidance?
Brian McKeon
Its in our projections Ashwin I think fundamentally the way that we’re going about during is really very – that our customers recognize that it is a function of investments that we’ve made it really in our value proposition, we’ve been investing aggressively if you go back a few years we talked about the need to invest in security and how we are making those investments and that we wont go to realize value having full investments are in place. It wasn’t a competitive issue right, we were already more secure than in our competition in this market requirement.
So we found it very much to the investment that were making we’re really not seeing any material push back because of the marked upon – is very slight majority in individual customer.
Ashwin Shirvaikar – Citigroup
Okay guided and Bob you mentioned your presence in the healthcare segment in your prepared remarks as this may be too early to do this, but it might still be what – your could either size or qualitatively address the potential impact of healthcare record conversation specifically with the larger. I want to laid out in the Obama.
Brian McKeon
Well there is a great opportunity there again we have – to business in the last couple of year now have a dedicated focussed, this tremendous amount of opportunity, we have a strategy and placed ago after that we’ll relatively small compared to the market opportunity and as we go forward quarter-in-quarter, we described how we’re advancing that strategy, but there is a lot of business to be had there over the medium plant.
Ashwin Shirvaikar – Citigroup
Okay thank you more to come I guess very good quarter. Thank you guys.
Brian McKeon
Thanks Ashwin.
Ashwin Shirvaikar – Citigroup
Thank you.
Operator
Vance Edelson – Morgan Stanley
Hi thanks a lot. Just back on the 20 or 21 million for facilitating the capital leases, I just want to make sure that’s baked into the ’09 the EBITDA guidance and therefore if we wanted to be -- on an accounting basis with ’08.
We’re just lot 20 million of the guidance range right.
Brian McKeon
That is accurate as – 8 to 13% growth include in our 3 point – change.
Vance Edelson – Morgan Stanley
We won’t have a change, we won’t have million packed on net income or EPS because we have offset and depreciation and interest lines. Got it and sort of bigger picture question on the cross selling progress can you give us a few for how many cost of merge maybe on a percentage basis or taking multiple services how many you are just taking in a one core service and so far.
Thanks.
Brian McKeon
We continue to make that steady progress on that advance as that the I don’t have that state to breakout for this one with may lot of progress in cross selling in our customers. I will tell you that – that relative to our past we’ve improve relative to our potential at see a tremendous opportunity and improving or go to market effectiveness.
Again over a long period of time.
Vance Edelson – Morgan Stanley
Okay, great and you mentioned differing some data center CapEx into ’09, when you look forward based on what’s you are planned we accomplish in ’09 with that be the bulk of what’s to plan to expensive within next two to three years in that regard or with the ’09 data center CapEx bigger run rate for 2010, 2011 so far.
Brian McKeon
Yeah, I think it’s a where the ladder we’re going to be continuing is growth capital support additional business and I think we are tried to highlight some of the more discrete items that are impact in the ’09 number which are the advancement in rationalizing our – real estate and the incremental investment in the growth opportunities, which is around complaint federal records but I think our underlying growth rate we’re very pleased with the progress and making an improving efficiency and I will look at system are going forward.
Vance Edelson – Morgan Stanley
Okay, that helps. Thanks.
Brian McKeon
Thanks.
Operator
Your next question comes from the line of Andrea Wirth with Robert W. Baird.
Andrea Wirth – Robert W. Baird
Good morning.
Brian McKeon
Good morning.
Andrea Wirth – Robert W. Baird
When you could address a little bit what’s you are seeing with your customers in the financial sector and a last analyst say, you have talk about how you actually thought about turmoil in the financial sector would actually could actually being that positive for you could you talk about those customers still growing in lined with your core business are they lagging are they actually growing a little bit faster?
Brian McKeon
Our storage remains very solid we are seeing pressure Andrea on discretionary projects – there are some deferrals as it relates to imaging projects and new endeavors by in terms of our underlying business it remains very solid I do believe will be an net beneficiary overtime simply because regulations will prove – risk has to reduced cost has to reduced that is our value proposition. But right now its fairly distractive sector the good news is our the core business
Andrea Wirth – Robert W. Baird
And then just a quick question on fuel could you remind us what fuel is as a percent of your cost and then when you look at it – mentioned commodity cost in total of how about at 2% impact I am assume the vast majority of that’s paper but could your break that down between paper and fuel.
Brian McKeon
All right our energy cost as we talk in the past year about 3% of revenues that half of that is related to transportation and half of that’s relates to utilities and our facilities you are correct when we talked about commodity pricing we realized a benefit of this year probably a little sales of 1% of our overall revenue from higher fuel surcharges that’s changed quite a bit and as we look forward we are anticipating lower fuel surcharges next year so that 2% impact number the combination of paper on lower fuel pricing I just want to fuel surcharge pricing do want to highlight that the net impact of changes in energy cost are somewhat neutral for our business in that the fuel surcharges are intend to offset change in transportation energy cost so we net don’t see a significant impact on that front and we would anticipate in some benefits on hopefully in the utility side over the time that will support our gross margin outlook further. The profit impact from fuel changes is somewhat significant for us.
Andrea Wirth – Robert W. Baird
Just one final question just what was the overall pricing contribution to revenue this quarter.
Robert Brennan
We don’t break that out for a company what I would say is overall because obviously saw a variety of different price product and services globally. We have highlighted in the past the trends on our records management storage pricing and as we finished this year on o year-over-year basis our run rate is we are up about 3% year-on-year which is where we were hoping to get to we think that's a good level and that is incorporated into the break out look that we have for next year.
And we feel very good about our ability to sustain that kind of value proposition.
Andrea Wirth – Robert W. Baird
Thank you a nice quarter.
Robert Brennan
Thank you.
Operator
You next question comes from the line of Kevin Mcveigh with Credit Suisse.
Kevin Mcveigh – Credit Suisse
Great thanks.
Robert Brennan
Hi, Kevin.
Kevin Mcveigh – Credit Suisse
Hey, how are you? Real nice job.
Given the headwind against commodity cost in the fourth quarter you saw real nice margin expansion overall could you kind of just help us understand what's the most incremental draw before?
Brian McKeon
In couple of different factors and the gross margin line Bob talked about this in his comments but we are really driving net driving excellent this year in North American business on a number of fronts we just spoke to some enhancements to our pricing trends productivity initiatives I hope to improve storage margins, the efforts we are putting against transportation improvement or helping with our labor efficiencies and on the gross margin line also all contributors and as the highlighted earlier in the year, we’ve going to our overhang cost early in there are really driven acquisition integration more than anything as well as investments we initiated late in 2007, what we have been executing very discipline approaching as our investments and cost management this year and we saw the benefit that in Q4, with the moderate in growth rate, so safety we’ve drive in business – hard. This business has a lot of potential and we’ve been using this share to get very focused on organic execution and its paying off and we will going to build on that is we are going forward.
Kevin Mcveigh – Credit Suisse
Great and then the CapEx shift from the incremental data center moves how much was add in ’08 into ’09.
Brian McKeon
It’s a roughly $10 million.
Robert Brennan
Okay, we just want to highlight we obviously at – came into the March number that we are report casting few months ago and this want to highlight that is one of the factors going that improvement.
Kevin Mcveigh – Credit Suisse
Great thank you.
Operator
Your next question comes from the line of Andrew Steinerman with JP Morgan.
Andrew Steinerman – JP Morgan
Hello, gentlemen. I want to talk about the margin expansion that’s implied in 2009 by clipping your revenue growth by 2 point in keep EBITDA growth at 18% to 30% obviously you are catch on some margin expansion here, could you talk about do you think you are seeing more in the gross margin line SG&A leverage what did you confidence in the ability to product margin expansion here.
Brian McKeon
Yeah, and Andrew, just want to build on in earlier question from events keep in mind that about three points on the gain as related to the that vehicle lease change, if you peal that are out of our internal growth is 5 to 7, we’re employed constant dollar at the growth is 5 to 10 so its moderate margin improvement, we have couple of different dynamics going on. We expect to sustain solid gross margin as we work into next year there will be some impact obviously related to the changes in recycle paper pricing that sets something we can address overtime but in this short-term that’s the high margin revenue that will decline and so that is offsetting that a bit and so that we are looking to sustain our gross margins and we think that will the source of our margin improvement as we move forward on the SG&A [prompt] we are looking to sustain our revenue roughly in lined with our cost growth roughly in lined with our revenue growth and the higher balanced approach there and I think there was a key point Bob was forcing in his comments is that were driving efficiencies but we are also looking to invest in the future businesses well and you got in the balance later.
Robert Brennan
And the strategy is the same strategy Andrew that will in place for you are trying I mean we are repetitive with focussing on growth returns and our three phases but it – dividends when you stayed focussed on that same strategy for long time.
Brian McKeon
And we feel pretty good about our – put forth numbers that imply a profit add are above the rate of revenue despite some of these [Christopher] highlighting the – recycle paper we are very committed to improve the underlying returns in business.
Andrew Steinerman – JP Morgan
Right did you have change anything over the last couple of months to achieve that particularly I am talking about the gross margin line or is this what you had been planning ever since kind of late 2008.
Brian McKeon
I would say it reflects plans that we’ve had in place since 2007 that we we’ve – against we’ve been last few month clearly like any company we’ve been revisiting our investment plans to make sure that we are lined with our growth outlook and we are getting tighter about that but I think we’re…
Robert Brennan
We already had this upon in our operating rhythm, but we become more and more and more discipline in light of the conditions that we see in the pressure on the complementary revenue sure.
Andrew Steinerman – JP Morgan
That’s very responsible. Thank you so much.
Brian McKeon
Thanks Andrew.
Andrew Steinerman – JP Morgan
Welcome.
Operator
Your next question comes from the line of Edward Atorino with Benchmark.
Edward Atorino – Benchmark
Talked about your acquisition thoughts – down and not really looking – lot of stuff if we do not make acquisitions would free cash flow go up even with the little jump in CapEx and is that CapEx number – as it looks like did like last year.
Brian McKeon
Yes I am afraid one of use of – down is really describing our customer is related to new purchases where no way hunger down, I want to impress upon the listeners that we’re very aggressive in intend on expanding our business and our growth – that will include some acquisitions especially as we see some shakeout environment where we expect prices to become cheaper. We do not expect, we opposed the acquisitions today is in our core North American business in our core business in general, most of all, we do internationally is true joint ventures and that really we just focussed on where there’re opportunities – add to our platform from DMS prospective in a digital prospective.
We don’t still the need to move right now, we think the market coming to us. We will be careful about watching our targets and to look at our past from a DMS or from a digital prospective.
We generally have existing partnership with people that we are look expander deepened our partnership so we generally telegraphed these things.
Edward Atorino – Benchmark
You have Stratify, which is sort of one note play in the eDiscovery business is that an area that's right to be and we rolled up in the sense but sort of expand I guess in that position we will expand laterally I suppose in the eDiscovery business?
Brian McKeon
I think you are right at there are opportunities laterally we do see what we with Stratify is eDiscovery services as a platform radar and that's why its gotten the attention of PriceWaterHouseCoopers and Navigant. But you are correct I think that there is lateral expansion opportunities but some of that is organic right we have a tremendous amount of intellectual property in that business so some of our expansion that will have in organically but we expect to shake out in that business further it's a smaller fragmented market.
Edward Atorino – Benchmark
Yes.
Brian McKeon
And, I would expect prices to run away on us. Anything that will come to us.
Edward Atorino – Benchmark
And on the CapEx question.
Brian McKeon
I am sorry.
Edward Atorino – Benchmark
In CapEx it's looks a jumping up in '09 over '08 is it kind to go back to the 13% of revenues or is it likely the sort of trend down going forward.
Brian McKeon
Well I think I will step back and say that '09 and midpoint of our guidance is basically 12.5%
Edward Atorino – Benchmark
Okay
Brian McKeon
CapEx excluding real estate is a percentage of sales, which is….
Edward Atorino – Benchmark
Lower yeah.
Brian McKeon
We actually exceeded our targets in driving capital efficiency in '08 and so I would there are some increase that are desecrate to kind of growth in rationalization we are making but we combined we are $110 million to lower to combine '08 and '09 capital we shared in the investor day so we are driving lot of capital efficiency right now.
Edward Atorino – Benchmark
Thank you very much.
Operator
Thank you. You last question comes from the line of Franco Turrinelli with William Blair and company.
Franco Turrinelli – William Blair
Can you hear me?
Brian McKeon
Franco.
Robert Brennan
Hi, Franco.
Franco Turrinelli – William Blair
Although when I going to back to one observation which is in the North American, not makes the businesses performing its seems exceptionally well, but it seem like we’ve so being talking about Europe on international business can you set for some time and I guess I would like to go back over some of things your do a specially to improve the performance to the international business in when we’ve might see some improvement back.
Brian McKeon
Sure, so it does take time we haven’t talking about some time just you give us some perspective on it we’ve essentially upgraded the entire management team across a European business in the last two years putting infrastructure related to reporting systems as well as just some of the productivity initiatives that – we’ve actually been doing for years in North America and we are seeing in the gains from that we’ve been putting I mean in place over the last couple years. And because its really three different groups of businesses, right you’ve got joint venture partners you’ve got small acquisitions in countries we were still subscale, when you’ve got the large businesses in Australia an UK and so we think about in three different [crosstrees].
And how we manage those, I feel very good that that were positioned in UK and Australia, you will start to see the return improvements it takes longer with our joint ventures and out smaller country positions just you guesses the scale issues but, we do have a long view on this front and we believe that we can peruse North American life return over time but it is the – that is taking a little longer than – then we thought of two years ago, but I absolutely confident that we got there.
Franco Turrinelli – William Blair
Just on goal, it is an fundamental differences that we should be aware of – growth backwards from exciting customers which is although see big part of the U.S. business is growth or pricing or rather things that we should understand from growth point of view.
Brian McKeon
From a pricing perspective I think some of the dynamics of the same that we have significant competitive advantage, and where we have both that presence in this large market by U.K. and Australia we have that competitive advantage, it doesn’t exist to the same extend where we have very small presence.
The other opportunity that exist internationally is that there – but for a helping customers with what inside the box which is have a describe our document management solutions business this will be a bigger part of our growth going forward and we feel that that it is very much build are be in the – information and that there is the our value proposition resin it on worldwide basis.
Robert Brennan
Its part in do way a very small presence.
Brian McKeon
So, scaling those areas is critical to us. In general I think you can see as peruse over time, the kind of returns that you are start to see in the North America.
Franco Turrinelli – William Blair
Thanks Bob.
Robert Brennan
Thanks Franco. Well, thank you all for your time and attention today we’re started to ran a few minutes over I may hope you have good rest of today.
Operator
Thank you. This concludes today's Iron Mountain’s fourth quarter 2009 earnings webcast.
You may now disconnect.