Encore Capital Group Inc (ECPG) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Encore Capital Group’s first quarter 2006 conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session. Instructions will be given at that time.

If you should require assistance at any time during the conference, please dial star, zero and an operator will assist you. As a reminder, this conference is being recorded today, Tuesday, May 9th, 2006.

I would now like to turn the conference over to Mr. [Tony Rossi] from the Financial Relations Board. Please go ahead, sir.

Thank you, Operator.

Good afternoon, and welcome to Encore Capital Group’s first quarter 2006 conference call. With us today from Management are Brandon Black, President and Chief Executive Officer, and Paul Grinberg, Chief Financial Officer. Management will discuss first quarter results, and we’ll then open up the call to your questions.

During the discussion today, Brandon and Paul will be referring to information contained in a slide presentation. This presentation can be found on the Company’s web site at wwwencorecapitalgroup.com in the Investor Section on the presentations page. Brandon and Paul will be referring to the appropriate slide numbers throughout the call.

Earlier today, Encore Capital Group filed its 10-Q for the quarter ended March 31st, 2006. This is a complete report of Encore’s results, and we encourage you to read it thoroughly as 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 by such forward-looking statements.

For a discussion of these factors we refer you to the Company’s SEC filing, including its Annual Report on Form 10-K for the year ended December 31st, 2005. 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 that reflect the occurrence of unanticipated or anticipated events, whether as 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.

The first quarter was another strong quarter for Encore. Gross margins reached record levels of $87.6 million, a 33 percent increase from $65.9 million in the first quarter of 2005. We believe these strong collections demonstrate the superior portfolio equation that is generated by our consumer level analytical approach. This approach will continue to position us well to capitalize on future opportunities.

The fundamentals of our industry remain strong with expected future increases in supply as consumer debt levels rise, and creditors across different asset classes, including automobile deficiencies and healthcare force sales to monetize to charge-off debt.

Although we had record collection performance, EPS for the first quarter of 2006 were $0.20, down from $0.32 in the first quarter of 2005. There are four significant items that impacted EPS and make it difficult to compare to last year.

First, the continued shift in our collection mix from portfolios with higher multiples to portfolios with lower multiples. Second, additional expenses incurred on new portfolio liquidation strategies. Third, stock option expenses associated with the adoption of SFAS 123R, and, fourth, the diluted impact of Ascension this quarter.

To clarify the impact on EPS I will discuss the first two items in detail, and Paul will cover the other two items, as well as provide a more detailed look at our results.

As I mentioned in previous earnings calls, our collections are shifting towards more recently purchased portfolios with lower collection multiples and lower revenue recognition rates.

As slide one indicates, 56 percent of revenue in the first quarter of 2006 came from portfolios purchased over the past two years, compared to only 28 percent in the first quarter of 2005. These portfolios are in full groups that have collection multiples ranging from 2.1 to 2.4, compared to portfolios acquired prior to 2004 which are in full groups that have collection multiples generally ranging from the mid 3s to the mid 4s.

The lower multiples result in higher amortization rates and lower revenue recognition rates. We can also see from slide 1 that our zero basis revenue decreased from 21 percent of revenue in the first quarter of 2005 to 11 percent of revenue in the first quarter of 2006. These collections have 100 percent revenue recognition rates, and at zero basis revenue declines our overall revenue recognition rate declines, too.

The affects of this mix shift were evident in the first quarter of 2006. We increased collections by 33 percent, while revenue from receivables portfolios increased only 14 percent. This shift and the related impact, which are not unique to Encore, are a direct result of the higher prices paid for portfolios over the past two years. As we’ve said in the past, the prices for portfolios continue to be at historically high levels.

We continue to believe that many participants are closing deals at levels that will ultimately prove unprofitable. And although we believe that pricing will moderate at some point in the future, we are not assuming any pricing decreases in our business planning and in our operating assumptions.

Instead, we are focusing on improving liquidation and increasing overall collections at current pricing levels. Maximizing dollars collected less dollars spent has always been a focus here at Encore, and has led to industry leading portfolio liquidations, calculated at cumulative collections as a percentage of purchase price.

Over the last few quarters we have been focusing on developing incremental liquidation strategies in our existing revenue channels and identifying new channels that could improve future liquidation. To date, two significant innovations have been identified, and during the first quarter we made significant investments in these areas.

While for competitive reasons we do not plan on discussing these new strategies in detail, they relate specifically to our external legal and direct marketing channels. In both of these channels we have identified new techniques to increase liquidation for a segment of our accounts with historically minimal liquidation.

These additional expenses are reflected in our cost per dollar collected in the external legal channel and in our other operating expenses. The impact of these investments was an additional $2.3 million in expense, which reduced our earnings by approximately $0.06 per share after taxes.

The most significant liquidation initiative that we’ve been working on has been an expansion of our internal sites to include a collection site in India. Again, for competitive reasons, we have not publicly discussed this new strategic initiative before, even though we’ve been working on it for more than a year. We made the decision in the first quarter of 2005 to pursue a strategy in India that would be incremental to our domestic collection efforts.

As part of this process, we initially evaluated outsourcing, a portion of our collections to an offshore third party. We determined that if we had taken the outsourcing approach we would have been dependent upon their technology, people, and processes and would be competing with other clients.

Therefore, we decided that a higher level of success could be achieved from having an ownership interest in an entity that shared our commitment to analytics and technology. We were fortunate to find a partner that had a successful track record of building businesses in India and that viewed data analytics as the key to the success.

After investing a significant amount of time in both process analysis and a pilot study, a joint venture was formed, creating our first international collection site. Today, our India collection site has approximately 100 employees and is focusing on accounts with historic low liquidation levels, such as small balance accounts.

This site uses our systems, technology, and processes, including our recruiting and training methodologies. It is managed day-to-day by a strong team onsite that receives daily input from senior managers in the U.S. across all of our disciplines.

The account managers in India use the same software as the account managers in our U.S. sites. We track their performance using the same statistics, and they receive data securely over dedicated circuits. The only difference is that our account managers in India are collecting on accounts that we cannot profitably collect on in the United States.

While costs are expected to be relatively lower at this site, in the end this is not a cost play for us, but one of improving liquidation. As such, we expect to see increasing collections and to date our results have been excellent, with account managers exceeding the targets we established for them.

Assuming performance continues to track to our plan, we will expand our headcount there. With our current plans, we expect to have 200 employees in India by the end of the year. To give you a sense of the magnitude of this opportunity, we currently own more than 2 million accounts with balances less than $500.

Prior to our investment in our India site we had limited collection strategy due to the high cost to collect these accounts, either internally or through outsource agencies. Additionally, our India site will provide us with a purchasing opportunity in small balanced accounts, which historically we have not been able to justify because of high pricing levels.

Before moving on, I would like to take this opportunity to publicly welcome the team in India to the Encore family, and thank them for their strong efforts to date. They will be an important part of our growth strategy in the coming years.

While we believe these investments will generate incremental cash flows, it is too early to quantify the magnitude and the timing of the increased liquidation with enough certainty to adjust our collection forecast, although that is clearly the long-term goal.

Until we can accurately model the amount and timing of the cash flows resulting from all of these activities, we will take a conservative approach to estimating our remaining collections and will not increase the IRRs on our portfolios. So, for now, we have the cost of these activities without the corresponding revenue.

As we’ve stated in the past, we manage our business for the long term. While earnings from quarter to quarter are important, we will continue to make these and other investments that may impact earnings in a particular quarter when we believe the investments will generate long-term earnings growth and value to our stockholders.

A few other factors affecting earnings are stock option expenses and the impact of the Ascension results will be addressed by Paul in more detail. But from a high level, stock options impacted earnings by slightly more than $0.03 per share after taxes.

Additionally, Ascension had a negative $0.05 per share after-tax impact on our results, partly due to amortization expense which we provided guidance for on our fourth quarter call, and partly due to the timing of revenue recognition. That being said, Ascension did generate positive cash flow during the quarter, and we continue to remain excited about the growth prospect of this business.

Turning to purchases for the quarter, we invested $27 million to buy approximately $560 million in face value of debt. The fist quarter pricing environment remained elevated, and supply was below the fourth quarter of 2005 levels. However, we did find several attractive opportunities particularly in telecom portfolios.

As we stated in our last conference call and are reiterating today, every asset class has an appropriate price. Based on our experience, we believe we have the ability to accurately value and efficiently collect upon telecom debt, and expect that it will continue to be a profitable area for the Company.

During the quarter we purchased one R&D portfolio for $3.6 million, which we are accounting for on the cost recovery method, because the affect of lowering our multiple on Q1 purchases from 2.2 to 2.1.

We also closed our second purchase of healthcare receivables. In this asset class we continue to be pleased with the collections to date, and are happy to announce that we have recently billed and began collecting through a fully HIPAA compliant internal collection team to focus on healthcare collections. We expect this internal team to grow over time and expand our capacity for purchasing additional healthcare receivables. This will enable us to grow without being dependent on third-party healthcare debt collection firms.

Overall, we remain steadfast in our disciplined approach to purchasing, buying only those portfolios that meet or exceed our ROI hurdle rates. The $27 million investment in portfolio was paid entirely from the quarter’s cash flows. In addition, we were able to pay-down $12 million in debt.

With that, I’d like to turn it over to Paul to review our results in more detail.

Thanks, Brandon.

First, let me talk about our collections business. As Brandon stated earlier, our gross collections in the first quarter of 2006 were almost $88 million, an increase of 33 percent from $66 million in the first quarter of 2005.

In the first quarter, all of our collection channels increased their contribution over the prior year. Due to the joint venture structure of our India investment, collections from our India site are included with our outsource agency collections and the employees in India are not included in our reported headcount.

With regards to sales, we continue to be opportunistic and take advantage of the elevated pricing in the marketplace. Specifically, we are selling certain types of accounts largely from purchases made in 2003 and earlier at prices that exceed the net present value of our expected remaining cash flows.

This resulted in approximately $7.1 million in collections from the sale channel this morning versus $3.3 million in the first quarter of 2005. If prices remain elevated we believe this will be an avenue we will continue to pursue but not rely on.

Our revenue from receivable portfolios in the quarter was $58 million, a 14 percent increase over the $50 million in the same period of the prior year. Revenue recognized on receivable portfolios as a percentage of portfolio collections was 66 percent in the quarter, compared with 77 percent in the first quarter of 2005.

In any given period, the revenue recognition percentage is generally impacted by three factors: first, the mix of collections coming from higher and lower multiple pools; second, the impact of seasonality; and, third, the timing and volume of purchases during the quarter.

Brandon has already explained in detail the impact of mix. We expect this shift to a greater percentage of our collections coming from lower multiple pools to continue, even though we are focusing a significant amount of time and effort to develop strategies to improve the liquidation in collection multiples of our recent purchases, and Brandon has described some of these, we don’t expect these multiples to exceed the above average multiples of our purchases in the years prior to 2004.

Second, the percentage is impacted by seasonality. To explain the impact of seasonality please refer to our example on slides 2 and 3. Slide 2 shows the relationship between our revenue and collections. Revenue, the blue line, is typically at its highest level immediately after a purchase and then gradually declines over time. Collections, the green line, typically ramps up two to three months after the purchase, then gradually declines. However, collections are impacted by seasonality, as you can see by the periodic spikes in the collection curve.

Slide 3 introduces revenue as a percentage of collections, the yellow line. In periods of seasonally high collections this percentage will be lower. Point A on slide 3 is a period when revenue is $6 and collections are seasonally high at $9, resulting in a revenue to collections percentage of 57 percent. At Point B on slide 3, revenue is lower than it was at Point A at $4, but because this is a seasonally lower collections period with only $5 in collections, the revenue to collections percentage is higher at 80 percent. During the first quarter of 2006 we experienced high collections resulting in a lower percentage, later in the year this will not be the case.

A third factor that impacts the rate is the timing and volume of purchases. Since collections often don’t ramp-up until two to three months following a purchase and revenue is highest in the months immediately following the purchase, revenue recognition rates can be higher when large purchases are made late in the previous quarter. In future periods, our revenue recognition rate will continue to be impacted by these three factors.

Finally, with regards to revenue from receivable portfolios, net revenue recognized for the quarter was a $288,000 allowance charge. This included a $90,000 allowance reversal and a charge that was spread across five [quarters].

Before I discuss our services revenue and Ascension for the quarter, I wanted to point out that the IRRs we use to calculate revenue are based on portfolio collection curves. Historically, we have calculated our IRRs using 54 to 60-month curves, which we believe to be one of the shortest periods in the industry. We continue to see collections that are six to eight years from the time of purchase.

As we have more data available to accurately model collections beyond 60 months we will examine extending our curves and moving to collection periods that are similar to our competitors. We expect to begin this analysis shortly. If we were to extend the curves, we would expect our IRRs to increase, although the extent of the increase would depend on the amount and timing of the collections beyond our current curves.

From the perspective of time value of money, collections received more than five years from the purchase date have less value than earlier collections and, accordingly, until we complete our analysis we cannot comment on the impact this would have on our financial statements. If we extend our curves in the future and the impact of extending the curves is material, we will disclose this impact.

Now, let me talk about our services revenue and Ascension, in general. Servicing fees and other related revenue for the quarter were $2.9 billion, the majority relating to Ascension. Ascension’s revenue for the first quarter and for the remainder of 2006 was and will be significantly impacted by the pattern of account placements resulting from the acceleration of filing immediately prior to the effective date of the new Bankruptcy Reform Act.

As you can see on slide 4, Ascension experienced a dramatic increase in placement, particularly Chapter 7 accounts in the weeks leading up to the effective date of the Act, and a significant drop-off in placements subsequent to that date. Ascension has typically paid an up front and monthly fee for all account placements. As we’ve disclosed in our 10-K, all revenue for Chapter 7 placements is deferred and only recognized when the bankruptcy case is closed, which is on average seven months from placement.

Accordingly, the revenue associated with the spike in Chapter 7 placements will not be recognized until the second quarter of 2006. Depending on Chapter 13 placement volume and litigation levels, we expect that Ascension’s revenue during the second quarter of 2006 will increase significantly from the first quarter and should range between $5.5 million to $6.5 million.

For the second half of 2006 and early 2007 we expect that revenue will be negatively impacted by the low placement volumes following the spike. As you can see in slide 4, we expect placement volumes to reach historical averages by the end of 2006.

Ascension’s lower revenue in the first quarter, combined with approximately $1.1 million of non-cash charges relating to purchase accounting amortization resulted in a pretax loss of approximately $2.1 million or approximately $0.05 per share after taxes. The purchase accounting related charges are included in salary and benefits, other operating expenses, and depreciation and amortization.

When we first announced the Ascension acquisition, we understood that bankruptcy reform would have an impact on the business. Like others, we could not have foreseen the magnitude of the bankruptcy spike and the subsequent drop-off in filings and the impact that would have on Ascension’s revenue and earnings.

However, despite the lower placements in Q1 Ascension did generate positive cash flow during the quarter, and as we previously communicated, we expect that the Ascension acquisition will continue to be accretive from a cash perspective.

As it relates to new business development, our pipeline remains strong. We are in discussions with several audit finance companies and expect to close on a new client relationship within the next 60 days.

Turning to expenses, our total operating expenses for the first quarter of 2006 excluding Ascension were $39.7 million, compared with $30.3 million in the same period last year. Included in operating expenses was approximately $1.4 million in stock option expense. This expense is approximately $0.03 per share after taxes.

As we discussed previously, upon adoption of SFAS 123R we were required to include the expense of our new and vested stock options and other equity grants that are expected as the requisite services are rendered. On an apples-to-apples basis excluding stock option expense as a percentage of collections, operating expenses declined to 44 percent in the first quarter of 2006, from 46 percent in the first quarter of last year.

As Brandon mentioned, included in operating expenses were an additional $2.3 million in costs related to investments made in strategies that we expect will improve the liquidation of our portfolios in the future.

Moving on to interest expense, we expect that during times of strong collections, such as the current quarter while we did not invest in large amounts of portfolio or new acquisitions, our goal will be to pay-down outstanding debt. In the first quarter we were able to reduce debt by close to $12 million or 6 percent of the prior quarters amount outstanding.

Our total interest expense was $8 million in the first quarter of 2006, compared to $8.1 million in the same period last year. The continued interest component of interest expense was $4.7 million in the first quarter of 2006, compared with $6.9 million in the same period last year.

I’m happy to announce that earlier this month we amended our $200 million revolving credit facility. The amended facility contains several provisions, including the reduction in our interest rate spreads, which will effectively reduce our interest rate by up to 75 basis points. The extension of the facility termination date to May 2010 from June 2008, an increase in the expansion feature of the facility from $25 million to $50 million, and the modification and elimination of certain covenants.

Finally, our fully diluted EPS were $0.20 in the first quarter of 2006 versus $0.32 in the same period last year. To reiterate, the major factor affecting EPS was the shift in collections from higher multiple pools to lower multiple pools, which we indicated in our fourth quarter call would be a factor in our 2006 earnings.

Also impacting EPS were incremental operating expenses associated with new operating strategies of approximately $0.06, stock option expense of approximately $0.03, and the impact of Ascension of approximately $0.05.

Brandon stated earlier in the call that one of our focuses is maximizing gross collections less operating expenses. One of the measures we use internally to measure this is EBITDA plus portfolio amortization. This metric, which is provided on slide 4 approximates the metric used under our amended credit facilities to measure our performance. While defined slightly different in our amended facility, this metric is referred to as adjusted EBITDA.

In our opinion, this metric is an excellent indicator of our ability to profitably liquidate portfolio and taken together with our other financial metrics provides a more complete picture of the cash flows of our business.

As you can see, adjusted EBITDA in the first quarter of 2006 was $47.8 million, an increase of 32 percent from the $36.3 million in the first quarter of 2005. Despite what might be indicated by our EPS our adjusted EBITDA illustrates that we are generating strong, profitable growth, and we believe we can continue this trend.

Brandon.

Thanks, Paul.

The hallmark of our Company is our ability to adapt to changing market conditions. Today, we are trying to solve the realities of the purchasing market. Pricing is elevated, competition is high, and what may have worked in the past to generate above average returns will more than likely not work tomorrow.

As a result, we are proactively changing with the environment, seeking new ways to improve liquidation on our portfolios, expanding into less competitive growing segments of the distressed consumer space, and finding ways to generate increasing returns in the long-term.

With that, I would like to now open up the call for questions.

[OPERATOR INSTRUCTIONS.]

Our first question comes from the line of Daniel Fannon with Jefferies and Company. Please go ahead.

Hi, guys. Thanks for taking my question. The additional expenses that you said came from your investment in India, I think it was 2.3 million, how much of that do you view as ongoing or recurring expenses that we should be modeling in going forward?

Dan, the $2.3 million related to the two initiatives in our legal channel and in our marking channel. We didn’t disclose specifically what the expenses were associated with India. They were quite a bit less than that.

In terms of whether that $2.3 million will continue throughout the year, we do expect to continue pursuing those initiatives to the extent that they continue to generate collections based upon what our models are telling us they’ll generate.

So, we would expect to continue to make investments like that, the dollar value will fluctuate from quarter to quarter, but we will only continue to do so if we continue to see the collections and the potential future collections that our models are currently telling us are there.

Okay, sorry. Okay, thank you. And then when you look at, you know, back at your commentary originally when you guys bought Ascension, and then where are your expectations, and what’s coming in today, was it your expectation that we would be just dilutive to earnings or is it the impact? Obviously, you couldn’t time what was going on with the bankruptcy change and what that impact would be on the business, but how off are they from your original expectations or how close are they, I guess is a better way to put it?

The volumes are actually probably slightly ahead of what we expected. The one big change for us is after we close a transaction we re-look at the accounting for the Chapter 7, and that delay is what’s caused the greatest amount of impact. So, the big surprise for us was just seeing how large the spike was and then having to wait seven months to have any revenue on that spike, despite the fact that we’ve incurred costs the whole period. That’s probably the biggest change.

And then when we announced the deal, we also at that point hadn’t completed the purchase accounting, and we did indicate that any of our estimates were subject to the finalization of that.

So, there were additional assets that were, that we put on our balance sheet resulting in some, in the earlier years some additional amortization which we hadn’t fully modeled at that point in time.

But as we’ve indicated in the past it’s non-cash, it’s a non-cash expense, and as we expected from the time we announced the deal, we continue to be, it continues to be accretive from a cash perspective.

Okay. And then, lastly, can you give us any update on the Jefferson purchase from June? And then your outlook for, or if you did raise the yield and that, which I think I’m beginning to get the feeling that you did not, but your outlook for the possibility of that in future periods?

The portfolio continues to perform, as expected, strong collections. Again, that transaction was such a large transaction, you’re talking about $100 million transaction, increasing IRR is a pretty significant decision, so I think we’ll continue to look at it for a few more quarters before we make that decision.

Although that pool would be included in the pool Paul spoke about where the curve is only 54 months, and so if we do increase the length of our curve to be more consistent with our competitors we would expect the IRR to go up.

Okay, thank you.

Our next question comes from the line of Mark Hughes with SunTrust. Please go ahead, sir.

Thank you very much. Is there a base for portfolio collections? I’m not sure if you addressed this in your prepared remarks, but down substantially YOY. Can you say how much of that was related to the accounting treatment versus just flowing collections on older portfolios?

It’s completely due to the [drop] in the zero based portfolio that we’ve talked about for some time now. The new accounting literature will have it such that we don’t have nearly as much zero based collections, that we’ll just, you know, hopefully, as we pull portfolios be able to predict more closely, and we should not expect an increase in DBA, that should fall-off over time.

Okay. And then the portfolio sales – I’m sorry, what were they in the quarter?

The portfolio sales in the quarter were $7.1 million.

And then what was the comp last year?

3.3 million.

Thank you.

The next question comes from the line of Dan O’Sullivan with [Union Capital Partners]. Please go ahead.

Dan O’Sullivan: Hi, guys. Thanks for taking my question. Just taking a look at gross collections by channel, third-party collections, outsourced, I thought that that potentially would go down a little bit. I think the strategy there was with Jefferson Capital, that some of that would move away from third-party, can you talk to that a little bit?

In the third-party number you has kind of an addition and a deletion. You’ve got a shifting of some dollars coming in in-house rather than being worked by agencies, but up until the past month you’ve got the healthcare collections and the India collections in the outsource channel.

And so you see an increase, part of that is due to seasonality, but there are a couple of things kind of moving in and out, but we would continue to reiterate that over time that number will probably come down as a percentage of dollars collected.

Dan O’Sullivan: Okay, thanks. That’s very helpful. And one other thing, taking a look at the purchases during the quarter, about 40 percent is other in the Q, can you give us a little background on what’s included in there, what type of paper?

So, within that you’ve got, as we discussed, you’ve got some healthcare receivables, you’ve got telecom receivables, and that makes up the vast majority of it.

Dan O’Sullivan: Is there one class you’d say makes up a majority out of those two, or?

Telecom receivables would be the majority.

Dan O’Sullivan: Okay. And just taking a look at operating expenses, was there any other items in there that you had mentioned that we, from a modeling standpoint, cannot expect to be recurring?

No, nothing else that we would highlight. You know, we didn’t talk specifically about the expenses associated with our India operations, but those aren’t of the magnitude of the others that we’ve highlighted. But there’s nothing else, Dan, that we would highlight to be nonrecurring for modeling purposes. Just the options and you’ve go these other initiatives, and you’ve got the amortizations, the non-cash amortization expenses related to Ascension, and those are the significant ones.

Dan O’Sullivan: Okay. And I think the 2.1 million for purchase accounting charge, is that what you called it? Is that?

The $2.1 million includes, is the total number for the impact of Ascension on the quarter. The purchase accounting was approximately $1.1 million of that.

Dan O’Sullivan: All right. Thanks, guys.

[OPERATOR INSTRUCTIONS.]

Our next question come from the line of [Brian Gonick] with [Presario Capital Management]. Please go ahead.

Hi, good afternoon. Can you talk about amortization rates for the full year? I mean I understand that the first quarter was high. I think last year for the full year if you back out zero basis, you were at something like 28 percent amortization rate, does that sound right to you? And is that just going to be a couple hundred basis points higher for the full year?

Brian, what will happen, when I went through the three or four things, three things that impact the rate during the year for the second quarter and the third quarter, you know, the amortization rate will be impacted by the lower collection, so it will be much closer – there won't be as much variance in the amortization rate in 2006 as compared to 2005, as there was in the first quarter.

So, you know, over time the amortization rate, as Brandon mentioned, will continue to increase but because of the mix shift, but it will not be as pronounced as you look quarter over quarter, as it was in Q1.

So, it will certainly be lower for the full year than it was in Q1, so I’m just trying to understand how much lower?

You know, at this point, it’s going to be impacted by the mix of the collections and portfolios, it’s going to be impacted by our purchases, and depending upon the level of purchases that we’ve got during the year, the amortization will be impacted.

So, there are a lot of factors that go into it, so we’re not providing significant guidance in terms of what the rate will be by the end of the year. The only guidance that we are giving is that when you look at it quarter over quarter you won’t see the significant drop-off in Qs 2, 3 and 4, as you did for Q1.

Okay. Backing out zero basis collections, again, you’re kind of collections excluding that YOY were up like 45 percent. You know, what do you kind of see for the rest of the year? That’s a pretty big number in terms of what your collections growth might be YOY excluding zero basis.

Again, I think that’s, you know, I think the first quarter shows the strong collections. I will note that as you go out, Brian, through 2005 you remember third quarter 2005 was an exceptionally strong collection quarter, given it was, it [yielded] the large Jefferson Capital purchase.

So, I don’t think we expect a similar type of growth quarter over quarter, but we do expect, you know, growth in collections throughout the year, but it will never be at the rate of what we saw in the first quarter.

Thanks a lot.

The next question comes from the line of Justin Hughes with Philadelphia Financial. Please go ahead.

Good afternoon. Most of my questions have been answered. The only additional one I wanted to ask is on this 7.1 million of sales, how much revenue was recognized on that?

The way we treat sales, we treat sales as collections, so there’s not specific revenue attributed to a particular sale. So, a sales dollar for us is like a collection dollar through one of our collection sites or through the legal channel or through the outsourcing channel.

But if it was on a zero basis portfolio wouldn’t it be a much higher revenue recognition rate versus if it were, you know, some of the Jefferson portfolio that has higher costs?

Yes, so we have not broken down what portion of our sales were on zero basis accounts versus accounts that are accretion accounts.

Okay, can you just give us qualitatively, was it [zero basis] paper?

A very small portion of it is zero basis.

Is it fairly recent paper, or is it older paper?

It’s, as I said, it’s paper that’s primarily 2003 and prior, but it’s not – our zero basis revenue does not come primarily from the sales in the channel.

Okay, thank you.

One other comment on that Justin, the other thing is you factor in is while those sales have revenues associated with it, they also have the affect of having higher contingent interest. So, you know, those sales are done mostly because it generates incremental cash flow to the Company, but it’s not going to have a huge impact on revenue because an increase in revenue is generally offset by increasing interest.

Okay, all right, Paul. Thank you.

Our next question comes from the line of Jeff Nevins with First Analysis Corporation. Please go ahead.

Thanks. I just had two questions. One was could you just talk a little bit more, I guess I’m just not entirely clear on the extension issue. And what was, you know, how the model has changed or the revenue recognition has changed. Can you just walk me through that one more time?

Sure. I commented on specifically one part of revenue recognition, and that’s Chapter 7 placement. The way we recognize revenue on Chapter 7 placements is we don’t recognize it until the VII has closed, so it’s either dismissed or discharged. And typically it takes about seven months from the time of the filing until the time it’s closed. So, there was a very large spike in Chapter 7 placements, primarily in October of 2005 relating to bankruptcy reform.

And the up front fee that we received on those placements and in the monthly fees that we have been receiving on those placements don’t get recognized into revenue until seven months after the placements.

So, the – virtually all of that revenue from that spike that you saw on slide 4 will be recognized in the second quarter. So, our revenue for Ascension for Q2 we believe will be somewhere between 5.5 and $6.5 million, which is an increase over about $2.9 million this quarter, and that’s virtually all attributable to this spike in Q4 ’05 that’s not recognized in revenue until the second quarter of 2006. Does that answer your question, Jeff?

Yes, I think so. I’ll follow-up with you on that one. And then my other question was the collections growth in the quarter was pretty strong, and you just kind of answered this, but was it again because of the adjusted capital?

No, it apparently was due to the good investments we made in 2005, but we just saw strong performance across all of our pools. Part of it’s seasonality, part of it’s increased penetration of existing pools. Part of it’s Jefferson Capital, but it just isn’t, you know, magnified across all the different areas.

And as we had talked, we are deploying new strategies for increasing our liquidation across pools which does generate collections. And as we mentioned, while we have spent those dollars in the first quarter and we saw some collections, you know, we’re not at the point where we’re going to increase our IRRs relating to those collections until we have more data and more time and see how those strategies are ultimately panning out.

Thank you.

I’m showing no further questions at this time. Back to Management for closing remarks.

I just want to thank everybody for attending the call, and look forward to speaking with you on our next earnings call. Thank you.

Ladies and gentlemen, that does conclude today’s Encore Capital Group first quarter 2006 conference call. We thank you for your participation, and you may now disconnect.