Encore Capital Group Inc (ECPG) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Encore Capital Group third-quarter 2005 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, November 3rd, 2005. I would now like to turn the conference over to Tony Rossi of the Financial Relations Board. Please go ahead, sir.

Thank you, operator. Good afternoon and we'd like to welcome everybody to Encore Capital Group's third quarter 2005 conference call. With us to today from management are Brandon Black, President and Chief Executive Officer and Paul Grinberg, Chief Financial Officer. Management will discuss third-quarter results and we will then open up the call to your questions.

Earlier today, Encore Capital Group filed its 10-Q for the quarter ended September 30th, 2005. This is a complete record of Encore's results and I encourage you to read it thoroughly because it contains a great deal of useful information.

Before we begin, I'd like to note that certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company and its subsidiaries to be materially different from any financial results, performance or achievements expressed or implied with such forward-looking statements. For a discussion of these factors, we refer you to the Company's annual report on Form 10-K for the year ended December 31st, 2004 filed with the SEC. Forward-looking statements speak only as of the date the statement was made. The Company will not undertake and specifically declines any obligation to publicly release the results of any revision to forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, whether a result of new information, future events or for any other reason.

With that, I would now like to turn the call over to Brandon Black. Brandon?

Thank you, Tony, and good afternoon. We are exceptionally pleased with our third-quarter performance, as we generated the highest level of collections in the history of the Company. Our total collections were $83.9 million, a 40% increase over the previous year. It helped drive a 32% increase in our earnings per share to $0.33. We believe our results validate our differentiated business model that is built upon account level analytics, multiple collection strategies and intelligent diversification into compatible growth businesses.

In looking at results for the quarter, it is important to note that when we exceed our expected collections, as we did during the third quarter, we recognize the expenses associated with generating those excess collections but not all of the associated revenue. For revenue recognition purposes, unless we increase forecasted portfolio collections, revenue is reported on the original forecast regardless of collections. Despite this timing issue, we still had significant bottom-line growth.

We are very pleased with the early results of the Jefferson Capital transaction, as collections from the initial $2.8 billion portfolio have exceeded our expectations. While we don't plan to provide quarterly updates on collections from the Jefferson Capital purchases, we thought it might be helpful to provide a sense of the initial performance. During the third quarter, we collected $21.6 million or 23% of the purchase price against our initial forecast of $16.9 million. We also took receipt of the first three installments of our forward flow of Jefferson Capital. We provided a steady supply of fresh charge-offs to profitably collect upon during the quarter.

In general, the purchase market remained competitive during the third quarter, with a lower level of supply than in prior quarters. As a result of the initial bulk purchase and the forward flow agreement with Jefferson Capital, we were able to be highly selective in our purchasing during the third quarter and still generate significant year-over-year growth in our traditional collection business. For the year, our total purchases remain well above last year's level. Through the first nine months of this year, we invested $155.6 million to purchase $4.6 billion in face value of debt. This compares with $57.2 million to purchase $2.3 billion in face value of debt for the first nine months of 2004.

With the challenges presented by the competitive purchase environment, we remain focused on developing creative approaches for obtaining new portfolios that can be as successful as our Jefferson Capital transaction. Our approach is to look for larger portfolio purchases, where there are fewer competitors; more rational pricing due to the sophistication of the bidders; and more accounts in the portfolios, which enhances the predictability of our models. As a result of this approach, we expect our purchases will be larger and less frequent than if we were active in the competitive purchasing market for smaller portfolios.

While our record collections in the third quarter were attributable to strong productivity from all of our collection channels, we don't want to overlook the contributions for our collections staff. Over the past few years, we have used analytics, combined with the unique approach to recruiting, training and compensation to develop a high-quality professional staff that performs at a very high level. This has resulted in strong productivity and low attrition rates. From the second quarter of 2005 to the third quarter, collections per employee per month increased by approximately 10% while our year-to-date attrition rate for experienced collectors was less than 25%, which we believe is among the lowest in the industry.

Although we frequently talk about our investments in systems, analytics and even companies, it's ultimately our investments in people that makes a difference at Encore. I'm happy to announce that last night, at the Workplace Excellence Awards, an event sponsored by the San Diego Society for Human Resource Management, I was honored to accept an award naming Encore as an employer of choice in San Diego. This award demonstrates the success of the HR strategies and practices we have deployed, which provide a significant benefit to our employees and improve our bottom line.

During the third quarter, we also took two important steps to diversify beyond the traditional collections business and position ourselves to capitalize on emerging trends in the consumer debt recovery industry. First, we have taken a leadership position in the growing market for bankruptcy services with the acquisition of Ascension Capital. In late 2004, we identified the bankruptcy services market as one of the areas that wanted to pursue and we're very pleased to have done so by acquiring the industry leader in this space. Our interest in this area was driven by several factors. The market is experiencing significant growth, it yields higher margins than traditional contingency collection businesses, it has high barriers to entry, and finally, it engenders stronger than normal customer loyalty due to the improvement recovery rates that can be achieved.

There has been a great deal of speculation about how the new bankruptcy law would impact our industry, and we feel confident in saying that we have positioned ourselves to benefit from the changes. Although it may not have a material impact on the traditional collection business, we believe the new law can be a catalyst for driving additional lenders to outsource their bankruptcy administration. We anticipate that the most significant aspect of the new law will be a shift in bankruptcy filings from Chapter 7 to Chapter 13. This shift will have a positive impact on Ascension's business, because Ascension will receive additional servicing revenue during the longer life of Chapter 13 placements.

In addition, the changes in the new bankruptcy law will force financial institutions to redesign their bankruptcy processing systems, which some companies are indicating they are unwilling to do. Ascension is already making the necessary redesigns and is now very well positioned to service these lenders and further expand its client base. There is strong demand for Ascension's services and the pipeline of new business opportunities we referred to at the time of the acquisition has begun to materialize.

Since the closing, Ascension has added two significant new customers, which combined with the recent surge in bankruptcy placements leading up to the implementation of the new law, should allow this business to generate significant revenue growth in 2006. The pipeline continues to be promising and we are focused on building Ascension's infrastructure so we can effectively scale the business to meet the growing demand we expect over the next several years.

The second important step we took this quarter was the formation of our Medical debt purchasing business. There were three components to the establishment of this business. First, we formed a servicing relationship with a company that has 12 years of specialized health-care collections experience. In our opinion, the keys to success in the medical debt industry are convincing hospitals and health organizations to sell their debt and demonstrating that you have the requisite discipline and understanding of how to collect in a manner that is compliant with the regulatory requirements and demonstrates a sensitivity to the debtor. The experience and track record of our servicing department will be instrumental in this process.

Second, we purchased what we believe to be largest single self-pay portfolio ever sold in the medical debt business.

Third, and most importantly, we hired Fritz Heirich to manage this business for us. Fritz is an accomplished executive in the health-care industry, having served as CFO for Premier Insurance Management Services, a subsidiary of Premier Inc., which is the country's largest alliance of hospital and health-care organizations. We believe Fritz's background provides us with a powerful marketing entree into the leading health-care providers around the nation. By looking beyond the traditional collection industry and hiring a respected health-care executive to manage this business, we believe we have a significant competitive advantage that will help us to open doors to potential sellers that remain closed to other purchasers.

According to industry estimates, there are approximately 15 to $20 billion in annual charge-offs of self-pay receivables in the health-care industry with very little of it presently being sold. This is a market with vast untapped opportunities and we believe the foundation we have put in place has positioned Encore as the preferred purchaser of health-care debt.

With that as an overview, Paul will now take you through the financials in more detail.

Thanks, Brandon. Our gross collections in the third quarter of 2005 were $83.9 million, an increase of 40% from gross collections of $59.9 million in the third quarter of 2004. We had meaningful growth across all channels with the largest increases coming in outsourced collection agencies and sales. We have determined that for the present, the majority of the Jefferson Capital forward flow portfolios can most profitably be collected through the agency channel, which is driving the increase in that area. Ultimately, all of the portfolios will be serviced by our internal sites and our other collection channels.

In the sales channel, we were able to take advantage of the disrupted marketplace to sell some of our accounts above the net present value of the remaining cash flows. This resulted in approximately $8.4 million in collections from the sales channel this quarter. Revenue recognized on receivable portfolios as a percentage of collections was 69% in the quarter compared with 78% in the third quarter of 2004. The lower percentage is attributable to total collections in the third quarter of 2005, exceeding the expected performance in the period, which serves to raise the denominator in the equation and lower the revenue recognition rate. Although over the long term, we expect our revenue recognition rate to trend down due to the impact of collections from more recently purchased portfolios that have lower collection multiples assigned to them, we expect our fourth-quarter rate to be higher due to seasonal collection patterns.

Our total revenues in the quarter were $59.2 million, a 27% increase over the $46.5 million in the same period of the prior year. We recorded approximately $900,000 in impairment charges during the third quarter, which were charged against our revenue. As we have indicated in the past, small levels of impairments like this are to be expected from time to time and they are not necessarily indicative of poor portfolio purchases. This minor impairment relates to older pools of assets purchased in 2001 to early 2003, where we expect to generate 3.4 to 4 times our original purchase price. These pools have high IRR's as a result of our initial conservative outlook and subsequent increases in the forecasts over time. While still very productive, these pools underperformed our third-quarter collection estimates, which triggered the impairment.

Our total operating expenses for the third quarter, excluding Ascension, were $36.3 million compared with $28.3 million last year. As a percentage of collections, operating expenses declined to 43% from 47%. Our total interest expense was $8.5 million in the third quarter compared to $8.6 million last year. We are beginning to see our contingent interest decline to the levels we expected and it was approximately 35% lower in the third quarter of 2005 than it was in the same quarter last year. We continue to expect further declines in contingent interest in future quarters with the degree of decline dependent upon the ultimate rate of liquidation of our older portfolios.

Our fully diluted earnings per share were $0.33 in the third quarter of 2005, a 32% increase over the $0.25 in the same period last year. One of the highlights of the third quarter was our $100 million Convertible Senior Note transaction with JPMorgan Chase and Morgan Stanley. This transaction locks in fixed-rate financing at 3.375% for five years, which we believe will allow us to better manage our interest expense in a rising interest rate environment and increases our financial capacity to invest in new portfolios and attractive business opportunities. Additionally, the related hedging transactions effectively insulate stockholders from economic dilution until our stock price reaches $29.04, although for accounting purposes, prior to the maturity of the notes, we will include additional shares in our diluted shares outstanding during any period where the stock price exceeds $22.34. The Convertible Notes had a modest impact on our share count until we obtain stockholder approval of the net share settlement feature on October 28th. As a result of that approval, we will not be required to include the underlying shares of common stock in our future earnings per share calculations except under the conditions that I just described.

I would like to note that we have finalized the allocation of the purchase price for the Jefferson Capital transaction. Our original estimates were fairly accurate and we had just a slight reduction in goodwill and a slight increase in our allocation to the initial portfolio acquired. We have not yet completed our preliminary allocation of the purchase price for the acquisition of Ascension Capital and, therefore, at this point, we don't know the level of amortization expense that we will record for the intangible assets that we acquired.

Before I conclude, I would like to update our full-year 2005 earnings per share guidance by narrowing it to a range of $1.27 to $1.32 per share from the previous guidance of $1.25 to $1.33 per share. However, it is possible that our results could differ from these estimates depending upon the Ascension purchase price allocation I just mentioned among other factors.

I would now like to turn the call over to Brandon, who will provide some closing remarks.

Thanks, Paul. While we generally expect the competitive market conditions to persist, we believe the plans we began implementing a year ago changed the dynamics that impact our Company and we are very confident in our ability to continue generating growth in revenue and earnings in the long term.

Let me reiterate the key steps in our approach. First, focusing on larger portfolio purchases, where our valuation models and our access to capital give us a strategic advantage. Second, capitalizing on our leadership position in additional consumer debt markets, such as bankruptcy services and medical collections. Third, footing (ph) a unique operating platform that is predicated on analytics and technology. Fourth, seeking out additional businesses in the distressed consumer space with strong foundations in emerging markets with high growth potential. And finally, continuing to create an environment that attracts and retains the best human capital from across all industries.

In summary, we believe that we are attractively positioned within the consumer debt recovery industry. We have moderated the impact of factors beyond our control in the traditional collection business, while diversifying into complementary businesses that we believe will benefit from emerging trends in the industry. Collectively, we believe we have taken important steps that will enable our traditional collection business to continue to be a productive cash generator while adding new vehicles that can enhance our long-term ability to create additional value to our stockholders.

Now we will be happy to answer your questions. Operator, please open up the call.

(Operator Instructions). Dan Fannon, Jefferies & Co.

In looking at the Jefferson pool, the collections have clearly performed or seem to be performing better than expected. When do you think you guys might raise the yields on those pools so you can get the benefit in the revenue line?

Typically, Dan, we look at each portfolio or each pool every quarter and usually it's a couple quarters out before we will ultimately increase the yield. So we'll look at this again in the fourth quarter and see how it's performing against our expectations and then make decisions at that point as to whether we would increase the yields.

Okay. Then so for the pools that you took an impairment charge on this quarter, they were performing less for several periods in a row?

No, it's actually an interesting phenomenon. These are older pools, where initially, we were conservative in our estimates and over time we increased the IRR's such that at this point, the IRR's are very high. These pools also have relatively low bases. So when you have a high IRR, even if your anticipated collections in the future are going to outperform, in the immediate term if you miss your forecast, you have an impairment. Just the way time value of money works, the future collections discounted at a higher rate don't make up for an underperformance in the short term. So these are portfolios that have performed very, very well, continue to perform well, but in this particular quarter, there was an underperformance against the forecast for the quarter, and given the high IRR's, that results in an impairment. But overall, those portfolios are performing very well.

Okay, that's helpful. And then lastly, was there any onetime items in your expenses? Across the board, the G&A seemed a little bit higher than I was looking for. Was there anything else that wasn't necessarily recurring in that expense base?

No. In the quarter, we had slightly higher external legal expenses, which was a function of some of the activity that went on at the corporate level as well as are continuing to really actively fight any lawsuits we get as a company. So we've had some increases there, but that's the only one item that was higher than expected.

Joe Chandler, Stephens Inc.

This is David White for Joe. I think you guys gave some collected productivity numbers and some turnover numbers. Could you possibly repeat those, please?

We said that collected productivity went up quarter-over-quarter by 10% -- did you have the exact numbers?

Yes. We report average collections per employee per month, which increased from approximately 33,000 in Q2 of this year or 27,000 for Q3 last year up to 37,000 per month in Q3 of this year. And our attrition rates were just under 25%.

For the year, not for the quarter.

For the year.

Okay. The other question I had is, did you state that the reason that the agency collection expense was so much higher is because you are, I guess you're allocating the Jefferson Cap portfolio and using the agency channel to collect that portfolio? Is that what you stated? And if so, what drove that decision? What characteristics of the portfolio made you decide to do this?

Well, specifically, we are actually putting the forward flow component of the assets through the contingent agency cycle. When we bought the portfolio, the bulk portfolio initially, they had established a practice of placing accounts with agencies who were, quite frankly, very good and very comfortable working the assets. And as we looked at their performance, we thought at least in the first few months out of the gate, that the performance would be higher and the expenses would be lower if we worked it through their legacy agency. So we're just continuing the practice that we inherited and it has been quite profitable for us.

Okay. So going forward, something around the third-quarter levels is a fairly normal, what we should expect going forward?

There's one unique phenomenon in the third quarter that will drop off, and that is that the employees actually, in Jefferson Capital's St. Cloud facility, became our employees at the beginning of September, so the collections that came from those employees during July and August were reflected as collection agency outsourcing collections. So those will be reflected in our site collections going forward and were reflected in the site collections in September. So that will result in a decrease just because of classification. And then over time, as some of the paper comes back from the agencies, it will get reduced because of that as well.

Okay. Could you possibly quantify that number?

There was about $2.5 million of collections in our agency channel relating to the employees in the third quarter that would become part of our site -- that would've been part of our site had we employed them at the beginning of the quarter. And in terms of the latter, at this point in time, we are not disclosing what we think is going to be in-house versus in agencies.

Mark Hughes, SunTrust.

Anything you can say about your assumptions in the fourth quarter regarding your collections activity? Will it still be at a relatively high level and thus dampen margin like it did this quarter? Is that a fair assumption?

Yes, we really haven't given any guidance on collections for the quarter. It is a seasonally low collection quarter and so we would expect the normal seasonal pattern to be in place. But relative to our expectations, we aren't going to give any guidance on that.

All right. Might we think a similar pattern could dampen fourth-quarter profitability and obviously good collections are a good thing but weight on margins this quarter; might we think it will happen in the fourth quarter?

Without speculating, I think that if it were to happen, if we were to outperform again in the fourth quarter, you would have probably the same effect unless we chose to increase the collection expectation for those pools.

We typically don't expect to outperform and we said our curve is based upon where we think the collections are going to be and so in terms of outperforming, it's not an expectation.

Right. And then can you refresh me on the receivable sales over the last couple of quarters? What has been the general level?

For this quarter, sales were $8.4 million. In Q2, it was $7.4 million. In Q1, it was $3.3 million. Do you want to go back any further?

No, that's fine.

It has fluctuated in the 5 to 10% of collections range for -- going back quite awhile.

Exactly. Anything you can say about the earnings impact of the bankruptcy business on fourth-quarter earnings, not specifically, but is that a seasonally good period for them, accretive, dilutive, neutral?

I guess we are withholding any kind of guidance on Ascension until we get the purchase price allocation completed. The only note I'll bring up is we feel good about the business, given the surge in placement they got, but the profitability will all be a function of the purchase price allocation.

Charles Trafton, Americas Growth Capital.

Of the 8.4 million you sold this quarter, you mentioned you sold it because the purchase price you could get for it was higher than your NPP. Was that off stuff that you bought recently or was that older paper that you had already collected on?

It was both.

Both. You usually sell a little bit of everything you buy. Are you going to do that with the Jefferson paper also?

We have no plans right now to sell any of those assets. But what we've done recently, given the kind of higher pricing environment, we've been unable to sell pieces of portfolios because the markup would be beyond what somebody would pay you. And so what we've been able to do is find pockets of assets where the marketplace is willing to pay a rate at times significantly higher than our net present value. And as long as we think the pricing environment stays where it is, we'll be able to do that.

So higher prices -- are you saying it makes it harder to flip the stuff that you've bought recently --?

Correct.

But it's easier to sell the older stuff?

Yes.

Okay. Are more of your purchases now have no resale contingencies on them? Does the Jefferson deal have a no resale on it?

There's been no trend to increase, no resale provision. So we're not adapting our sales strategy to somebody else's requirement. We're adapting to the fact that we don't think we can get a price that would justify selling the assets. We'd rather keep them and collect on them profitably.

And what about the Jefferson paper? Could you resell that if you wanted to?

We could.

How many different people do you sell to typically in a quarter?

We would not disclose that. I will say we made multiple transactions in a quarter, but I wouldn't like to give you the numbers of people.

Right. Did you say attrition was 25% annualized for the quarter or for the last four quarters total?

We actually measure attrition on a static basis, so rather than adding to the numerator and the denominator, we look at the people who start the year with us and end the year with us. And we have lost a quarter of the people that started the year with us. So through nine months, we are at 25% attrition over that group of people.

What was that figure a year ago, roughly? Is that up or down?

It's almost the exact same number.

It's within basis points.

It looks like, just looking at the different places you have collections centers, San Diego, Knoxville, Arizona, etc., unemployment is about the same. Are you finding it the same? Are you expending the same energy to hire folks as a year ago? Or is it tougher to find people to work in call centers these days or easier?

The good news is lower attrition means we don't have to go out and hire a lot of people. We intentionally build a model that is not reliant on people growth to grow the Company. And so our hiring has been quite manageable because we haven't had to hire large numbers of people to replace anybody nor have we dramatically grown the site. We had the benefit of acquiring the site in St. Cloud, which took care of all the collector growth we needed in the quarter.

Right. Just a couple more quick ones. The people that you got with Jefferson were -- compare their productivity to yours. If you were at the, what was it, $37,000 per collector per month this quarter, up versus 27,000 a year ago, how do the Jefferson folks compare to that?

So I just want to clarify for a minute. The 37,000 number is per employee, so that would include me and Paul and anybody else.

Per employee, not per collector, okay.

The folks in St. Cloud actually perform at the exact same pace as our other two sites. And so we think we have three equally productive sites.

So they are not any more or less productive, they are the same, so there's no accretion from that in that figure? The 37,000 versus the 27,000 a year ago is a result of I guess legal doing much better than your own collectors doing a little bit better?

No, it's a function of the collectors getting better; it's a function of penetrating the legal portfolio more deeply. It's a function of kind of all the channels getting better and leveraging the intellectual infrastructure that we have, as well as having an increasingly productive collector work for us, which had also gone up year-over-year and quarter-over-quarter.

Okay. And then lastly, shares out for next quarter, what do you think, roughly, that figure will be? It will be higher than this quarter?

It will be a little bit -- I haven't run that calculation yet, but it will be -- the increment from the convert was 400 and some odd thousand shares for this quarter, so it will probably be just over a million for next quarter. And obviously, since we did the net share settlement, we got that approved at the end of October. Going forward, it will just drop back off to historical levels. So it will go up from 400,000 to around a million back to zero as a result of the convert.

Brian Gonick, Corsair Capital.

Sorry if I missed this but what was zero basis revenues?

Hold on, I will get that for you. Okay, zero basis was $6.8 million for the quarter.

And what's the estimated remaining collections on your portfolios?

The estimated remaining -- 656. And just to point out to everyone, we did file the Q today, so you should have that. All the data that you normally get is out there now.

Great. And how much of the purchases in the quarter came from the Jefferson forward flow agreement?

Typically, Brian, we don't disclose specifically who we purchase from in a given quarter.

Okay. Thanks, guys.

Rick Leggott, Arbor Capital.

Congratulations, good quarter guys. Just a little more color on the impairment charge. How many pools did you take impairments on?

Rick, we're not going through the specifics in terms of how many pools, but they were older pools. And just to give some color to it, there are a couple of the pools where the charges were less than $10,000, very, very small. It's really just a phenomenon of the collections performance during this quarter on those particular pools.

What was the dollar amount of the impairment?

It was approximately $900,000.

And I'm just curious, what would have caused the IRR's on these pools to have been raised?

These are older pools, so early on before we had implemented UCS when we had overperformed on certain portfolios, we didn't increase the IRR. Later on, we did increase the IRR. So these are IRR's that had been increased a year ago, a year and a half ago, not IRR's that have necessarily been increased recently.

So this is all post UCS?

Post UCS increases, correct. And many of these pools have very, very low book bases in terms of the investment note receivables.

I just wanted to understand because previously these would have went into zero basis and would have just --

Right, exactly.

-- built visibility for forward recognition. But anything else you can say about the other pools, dollars in other pools, that are close to being in that condition?

There are a number of pools that have high IRR's as a result of this phenomenon that I just described. So there's some of our older pools, '01, '02, beginning of '03 pools, have high IRR's, but they are performing in general very, very well, in all cases, in excess of 3.5 times the original purchase price.

All right. thanks, good job.

Dan Fannon.

Can you explain what the deferred revenue component is on your balance sheet that showed up this quarter?

That relates to Ascension Capital. So part of -- the way Ascension Capital builds its customers in many instances is that it charges the customers an upfront fee and then a monthly monitoring fee. The upfront fee is recorded as deferred revenue and is recognized over the life of the placement. So new placements will generate deferred revenue, which gets taken in over a period of time, depending upon whether it's a Chapter 7 or a Chapter 13.

Okay great. And how long are the -- Brandon gave some commentary about the new bankruptcy which is beneficial to you guys because it's harder for Chapter 7 and the life for a Chapter 13 placement is longer. Can you quantify, typically, give us some idea of how long that life is?

Without giving exact numbers, generally a Chapter 7's life will be less than a year, closer to half a year, and a Chapter 13 life will be, call it three years. So it's a significantly longer servicing window when you have a Chapter 13 over a Chapter 7.

Brian Hagler, Kennedy Capital.

I just wanted to get a little bit more clarification on the topic that was touched on earlier, the collection agency commissions. It sounded like there was some of that that's going to be going away next quarter. I'm not sure if that was the $2.5 million number you threw out there?

That was. The $2.5 million relates to the St. Cloud employees, the Jefferson Capital employees, who for two months of this quarter, were treated as an agency because they did not formerly become Encore employees until September.

Oh, okay. Okay, great. And then finally, I guess after you get the allocation of the Ascension purchase price finalized, hopefully, I don't know fourth quarter, will you be prepared to give '06 guidance later this year, or when do you typically do that?

We first began giving guidance right after the Jefferson Capital transaction. So we would look to make that decision at the end of the fourth quarter.

So you're saying if that's not finalized by then, then you might not be ready to give guidance at that point?

I think that's a fair statement.

Soneric O'Kale (ph), Bear Stearns.

I was wondering how you are thinking about the collectability of the Chapter 13 paper. Some may argue that with the change in the bankruptcy laws now there's a different kind of Chapter 13 debtor and that under the old law, Chapter 13 debtors may have been more willing to make payments on their debt, but under the new law, they've just failed a means (ph) test, and so they have to pay and they might be less willing to pay in this sort of situation. I mean I don't know if it makes any difference but I just wanted to see what your thoughts were as far as the collectability of the 13 paper post the new legislation.

That's a great question. If you remember in the Ascension business, they're working with secured assets, so the accounts -- they're working with someone who still has their car or still has their consumer good. So we believe that the collectability there will remain high. On the unsecured side, I think that's where the greatest unknown is. And if you recall, we do sell our Chapter 13 assets, and so that's something that will play out over time. Pricing will probably move around based on collectability, but we don't think it will have a material impact on our collections at all.

We do not purchase Chapter 13 assets. And our agreement to sell Chapter 13's is a two-year agreement, which started in June of this year. So we don't think it's going to have a significant impact on our profitability at all.

(Operator Instructions). Devin Murphy (ph), Chilton Investment Company.

I just had two quick follow-up questions. One was on attrition. The 25% number that you gave, did you say that was just with experienced collectors?

Yes.

Do you have a number for all collectors?

Typically what we disclose is the attrition for experienced collectors.

And how do you identify experience? Is it more than one year?

It's anyone who was not in training at the beginning of the year.

Okay. And your training is like six weeks? Is that right?

Our training is actually a little bit longer. Our training is actually up to six months. So we have kind of a class in training but people go through a learning curve where we keep them in a special environment with a higher kind of manager to employee ratio, so that could take a little while. So if anyone who is kind of greater than six months from higher date, it would be in there.

Okay. And then for those people who would fall into the less experienced bucket, have you seen any change in attrition over the last year or two?

We really haven't. We've not had to hire as many people again because the attrition rate has been low, we've not added a lot of new people. And with our acquisition of the St. Cloud, we picked up around 100 employees with the average tenure of about eight years, whose turnover is quite low. So we've been able to -- we've been fortunate to not be in a situation where we've had to hire a lot of new people. So we remain selective and not seen a big change in the trainee attrition.

Okay. I was hoping you could just comment on call center collections versus legal collections, the growth that you've seen over the last couple of quarters. Has that come more from legal than call center?

Well, our call center collections in Q3 of last year were 29 million versus 33 million this year. Legal was 19.6 versus 22.1. Nineteen last year, 22.1 this year.

Okay.

We continue to see growth in all of our channels, kind of across the board at varying rates. But we continue to see momentum in each of the channels.

Okay. And then just one last question. Have you seen a change in consumer behavior related to sort of a weaker consumer in terms of headwinds from energy prices or consumer confidence?

We have yet to come across any body of knowledge that would tell us the impact on our consumers, which are the distressed or the defaulting consumers with changes in macroeconomic environment. We don't see a lot of it. And if you think about our business, we are expecting such a small percentage of people to pay us that we're dealing with the very best of the consumers who have had a charge-off in their life. You know, over the life, we expect two out of ten people to pay us. In any given month, we expect less than one out of 100 people to pay us. So we don't really see a lot of movement in collectability positive or negative based on changes to average consumer statistics.

Okay. So it's safe to say then you didn't see a drop-off during the quarter from collections?

No, to the contrary, we had a phenomenal collection quarter, so we didn't see any impact from anything outside of our core business.

Gentlemen, at this time, there are no further questions. Please continue with any closing remarks you may have.

Thank you, operator. Before we conclude today, I would like to note that at the end of the third quarter, Carl Gregory moved into a full-time role as our Vice Chairman while I assumed the CEO position. Over the past five years, the Company made incredible strides under Carl's leadership and on behalf of everyone here at Encore, we would like to thank him for his contributions. Thanks, have a nice day.

Ladies and gentlemen, this does conclude the Encore Capital Group third-quarter 2005 conference call. You may now disconnect and thank you for using AT&T Teleconferencing.