Encore Capital Group Inc (ECPG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Encore Capital Group First Quarter 2010 Results Call. (Operator instructions)

I would now like the turn the Conference over to your host today, Ren Zamora, Director of Finance and Investor Relations. Please begin.

Thank you, operator. Good afternoon, and thank you for joining Encore Capital Group's First Quarter 2010 Earnings Call.

On the call today are Brandon Black, our President and CEO; and Paul Grinberg, our Chief Financial Officer. We will begin with prepared remarks and then follow with a question-and-answer period. Brandon will end the call with some final remarks.

Before we begin, let me take a moment to reference the Safe Harbor provisions. We want to remind listeners that certain statements made on this call are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These can be identified by words such as "intend," "believe," and "expect," and phrases using those or similar terms. Specifically, statements relating to projections of future collections, revenue, income, profitability, cash flow, non-GAAP financial measures, growth and expansion strategies, and ability to expand and utilize flexibility under our new credit facility are forward-looking statements.

We caution you not to place undue reliance on our forward-looking statements which speak only as of today's date, and we undertake no obligation to update these statements. Actual results may differ materially from any results expressed or implied by forward-looking statements as a result of risks, uncertainties and other factors discussed in the reports we file with the SEC, including our Forms 10-K, 10-Q and 8-K.

Our presentation today also includes information concerning adjusted EBITDA and other non-GAAP financial measures. We believe non-GAAP financial measures provide useful information to both management and investors in evaluating our operations. The presentation of this additional information should not be considered as alternatives to or more meaningful than our results prepared in accordance with GAAP.

Our press release issued today contains a reconciliation of adjusted EBITDA to reported earnings under GAAP, a reconciliation of operating expenses, excluding stock-based compensation expense; and bankruptcy servicing operating expenses to the GAAP measure total operating expenses, and a reconciliation of tangible book value per share to the GAAP measure total stockholders' equity.

You can access a copy of our earnings press release by visiting our Investor Relations website at www.encorecapitalgroup.com. As a reminder, this Conference Call will also be available for replay on our website.

Now, it is my pleasure to turn it over to Brandon Black, our Chief Executive Officer.

Thank you, Ren, and good afternoon.

Today's call is exciting for our Company, and for me. It allows us to resume a consistent dialogue with our key stakeholders and gives us the opportunity to describe a series of powerful improvements we've made to our operating platform. These changes have led to a sustained period of growth during one of the most challenging times in the history of our industry.

The last time we spoke in this forum was in August 2007. And since then, we have been laser-focused on repositioning and strengthening our business. We have significantly realigned our cost structure, taken advantage of a number of market opportunities, and have bolstered our infrastructure, which will lead to a long-term sustainable competitive advantage.

Our goals for today are to provide an overview of the key milestones we have achieved, highlight the metrics we use to monitor and manage the Business, and give a detailed overview of the quarter. We will present a more in-depth review in six weeks at our Annual Investor Day.

It's no secret that our industry has gone through a challenging period over the last few years. During the middle of the decade, many new entrants were lured into the market by the appearance of great returns, unaware of what it takes to generate truly meaningful results. This led to a rapid increase in portfolio pricing, often to the point where it was impossible to generate a profit. Since then, most of the new entrants and many of our industry peers have predictably struggled or disappeared due to poor purchasing decisions and a lack of sophisticated operating platforms. As a result, the dynamics of supply and demand have shifted radically.

Moreover, the pressures faced by our consumers have fundamentally changed the way many think about debt and savings. In addition to these economic challenges, our business has seen increased interest from regulators and the legislative community. We believe these changes reflect the accelerating maturation of our industry and provide new opportunities for us to partner with all of our key external stakeholders.

The improvements we've made to our operating platform have been primarily focused on four points. The first is our successful first-mover collection center in India. We began our journey in India back in 2005, as we saw portfolio prices spike significantly. It was our belief that we needed to create a low-cost call center that would give us a competitive advantage and allow us to create strong financial returns, even in the most challenging purchasing environments.

What we have been able to build is much more than that. After a period of testing and calibration, we realized that India not only provided us the ability to generate collections at a markedly lower cost, but also opened the door to a highly talented workforce.

In early 2009, we made the decision to dramatically increase our presence there and began the process of building a new facility, which was completed last September. Since then, we have increased the number of collectors to more than 750, up from 350 in the first quarter of 2009. Our total workforce in India now sees 1,000 employees, a 110% increase from the 485 people we employed there just one year ago.

In addition to call center activities, we are now developing software, managing parts of our technology infrastructure, handling complex analytics and processing a significant portion of our back office in India. We see unlimited opportunity there and look forward to continued expansion in 2010 and beyond.

The cost impact of what we have built in India is becoming transformative, as its collection contribution becomes more meaningful. During the first quarter of 2010, the Indian team contributed $25.8 million in collections, compared to $13.1 million in the first quarter of 2009. This increased contribution is the main driver in the reduction of our call center variable cost to collect, which has dropped by 60%, from $0.23 on the dollar to $0.09 on the dollar over the last three years.

Our second area of focus is analytics, where we have further strengthened our consumer behavior expertise and continued to invest heavily across all areas of our business. It is our belief that long-term success will be enabled by having an information advantage.

Oftentimes, it is assumed that our consumer base is synonymous with the term "subprime." In fact, we purchased accounts from consumers who spanned the entire credit spectrum at the time their account was opened, from superprime to subprime. Over time, these individuals found themselves in financial trouble and defaulted on their accounts. At that point, much of the data used to track their creditworthiness and ability to pay ends.

Since there's a lack of information about our consumer, we made the decision to become a repository of data and create our own insights into their payment, saving and decision-making behaviors. To accomplish these goals, since 2007, we have invested nearly $10 million on data to support our modeling activities. Today, we maintain a database of approximately 20 million consumers, accounting for almost one in 12 adults in this country. This significant investment has allowed us to build proprietary models that drive our portfolio valuation and operating strategies.

The third area of focus is the expansion of our legal platform. Not only have we increased the use of this channel, which has improved portfolio yield; we have refined our approach so that we are much more effective at identifying those accounts that are most appropriately collected through legal means. This enhancement has improved our overall cost to collect in this channel.

Finally, we continued to benefit from one of the industry's most stable, productive and tenured call center organizations. Our attrition, both domestically and in India, is approximately 25% per year, in an industry where 100% attrition is not uncommon. Our ability to retain talented professionals, combined with our emphasis on training and our specialized call center philosophy, has generated very high levels of productivity.

I want to underscore that we've made all of these enhancements while continuing to emphasize the socially responsible and beneficial function served by our industry. Perhaps at no other time has the importance of our industry been so clear, as federal and state governments, major lending institutions and consumers work to redefine standards for the business of lending, credit and financial health. The importance of the market-clearing function served by our industry has continued to increase. In fact, since 2007, our company has enabled nearly one million consumers to retire a portion of their outstanding debt.

We understand that our consumers are going through a difficult period, and we are continuing to help them with solutions that minimize the disruptive impact of our efforts, while maximizing the financial returns for our company. We are proud of the ethically driven contribution we make toward consumer debt recovery and are actively seeking new ways to support the country's ongoing financial rehabilitation.

In addition to the operational improvements I've just described, we have invested in our key leaders and strengthened our management team to ensure we have the appropriate bandwidth at the most senior levels. Notably, we have brought on George Lund in the role of Executive Chairman. George has played an important role in several areas, including our long-term strategic planning and relationship-building activities between Encore and the highest level of the senior management at banks and other financial institutions. George provides both (inaudible) the leverage we need to focus on driving near-term results and the flexibility to pursue long-term growth strategies.

In addition to George, we have added talented resources to our teams in the US and India, specifically in the areas of analytics and compliance, among others. These additions to our team will give us the bench strength we need to continue our growth trajectory.

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

Thanks, Brandon.

Before discussing the results for the quarter, I want to highlight a major financial milestone we achieved earlier this year. In February, we successfully refinanced our revolving credit facility, which will now expire in May 2013. In connection with the refinancing, we added several new banks to our syndicate, including Fifth Third Bank, Morgan Stanly and SunTrust. We are excited to partner with them and our existing lenders as we grow our business. Their commitment to Encore demonstrates confidence in our ability to continue to profitably deploy the capital they've provided.

Our new $327.5 million credit facility contains several important terms, including an accordion feature which allows us to expand our facility by an additional $100 million, for a total of up to $427.5 million. We are currently in discussions with several lenders about participating in our credit facility through the accordion. We believe that the accordion, when combined with our strong cash flows, will provide us with sufficient capital to pursue our increasing purchasing goals.

Another important feature is an enhancement to our borrowing-base calculation. The new formula for determining the amount that can be drawn in any period is more closely aligned to the lifecycle of a portfolio and provides us incremental availability as compared to our prior credit facility.

Finally, we have expanded flexibility in several areas, including higher thresholds on our capital expenditure, operating lease, capital lease and acquisition baskets. For those interested in more detailed information, we included our complete credit agreement as an attachment to our 8-K filed on February 8th.

I'd now like to turn to the metrics that we monitor most closely to evaluate our business. One of the most relevant for us is adjusted EBITDA, which reflects our ability to profitably liquidate portfolio and generate strong cash flows. It represents the cash flow we generate that is available for future purchases, capital expenditures, debt service and taxes.

For the first quarter, adjusted EBITDA was $82.6 million, an increase of 29% compared to the $63.8 million reported in the first quarter of 2009. This improvement in cash flow allowed us to deploy $81.6 million for portfolio acquisitions in the quarter, while only increasing our line of credit by $13 million.

Another critically important metric that we monitor is our cost to collect ratio, which was 42.9% in the first quarter of 2010, compared to 48.3% in the first quarter of 2009. This 540-basis point decrease is a key driver in our ability to be price-competitive, which we believe will enable us to continue to increase our purchasing levels in the future.

Looking forward, we expect cost to collect to fluctuate based on contribution by channel and overall collection volume. To help investors model this metric, we've recently added a table on page 23 of our 10-Q that shows the details on our cost to collect by channel.

The third metric that we track is the remaining value of our portfolio, which is reflected in our estimated remaining collections, or ERC. The purchasing levels for the quarter and our strong collection performance combined to significantly increase our Company's embedded value. From the first quarter of 2009 to the first quarter of 2010, we have grown ERC by nearly $150 million, to $1.2 billion. Said differently, we could stop purchasing today and still generate over $1.2 billion in future collections. This significant increase in future value was funded mainly by operating cash flows, as our line of credit increased only $20 million. At our Investor Day in June, we will provide you with more details on these and other important metrics.

Moving on to other financial results for the quarter -- collections were strong, at $141.3 million, up from $115.2 million last year. This quarter's collections were the most we have ever collected during a single quarter, and we are extremely proud of our team for achieving this milestone.

Our call centers contributed nearly 47% of total collections, at $65.8 million for the quarter. As a result of our significant growth in call center headcount, particularly in India, we expect continued growth in call center collections throughout 2010 and 2011.

As Brandon mentioned, we currently have over 1,000 employees at our India site, more than 750 of whom are account managers. Of note, 180 of these account managers have been with us for fewer than 90 days. As they progress through their training and development programs, we expect to see improvements in overall productivity and cost to collect.

By the end of the year, we expect to employ approximately 1,250 people in India, 925 of whom will be account managers. Since the growth in our headcount has important implications to our overall cost, we have also recently added additional disclosure, which you can find on page 30 in our Form 10-Q, which details headcount by site.

Given our strong collections in our call centers, legal collections represented 40% of our total collections, somewhat less than our recent experience and less than what we expect in the future. On an absolute dollar basis, collections grew slightly in this channel, to $57.1 million this quarter, as compared to $56.4 million in the first quarter of 2009. The remaining 13% of collections came primarily from third-party collection agencies. Agency collections have increased to $17.8 million from $7.7 million in the prior year, reflecting changes in the mix of paper we have been placing with our third-party collection agency partners.

Our revenue from receivables portfolios in the quarter was $82.9 million, an increase of 15% over the $72.3 million in the first quarter of 2009. As a percentage of collections and excluding the effects of allowances, the revenue recognition rate decreased to 64.3% from 67.5%.

As most of your know, we account for the Business on a quarterly pool basis, not at an overall level. This pool-by-pool level accounting treatment leads inevitably to noncash allowance charges. So, while total collections exceeded our forecasts by more than 17% in the first quarter, there were certain pool groups where we collected less than our forecast, resulting in net portfolio allowances of $7.9 million.

You can see our collection performance by pool group in the table in the Supplemental Performance Data section on page 26 of our 10-Q, which details our projection of future collections by vintage year through the remaining life of the portfolios. This, coupled with our disclosures on unamortized balances of portfolios and monthly IRRs, can help investors with their collection and revenue estimates. We would be happy to review these tables with you in more detail.

Turning to expenses -- our total operating expenses were $65.6 million, up from $60.2 million in the prior year. This was an increase of only 9% compared to the 23% increase in collections in the quarter. Included in operating expenses were stock-based compensation expenses of approximately $1.8 million and operating expenses of $3.3 million for Ascension, which is a fee-based business.

Finally, our fully diluted earnings per share were $0.44, compared to earnings per share of $0.38 in the same period last year. Excluding the $3.1 million gain, or $0.08 per fully diluted share on the repurchase of our convertible notes in the first quarter of 2009, fully diluted earnings per share increased 47%.

The improvements we've made to our platform, including our productivity enhancements and declining cost to collect, will allow us to be competitive in the purchasing market for the remainder of the year. As a result, we expect to reach our 2010 purchasing goal of deploying $300 million. As we continue to expand our team in India and continue to leverage our fixed costs across higher collection levels, our long-term cost to collect should continue to improve, providing us with the flexibility to be competitive in pricing.

With that, we would be happy to answer any questions you may have, after which Brandon will make a few closing remarks. Operator, please open up the line for questions.

(Operator instructions) Hugh Miller, Sidoti.

Good afternoon.

Good afternoon.

Was wondering if you could talk a little bit about the specifics regarding the convertibles, and the conversion feature there. Obviously, with the stock price kind of moving up here as of recently, just wanted to kind of take a moment to go over that.

Sure. The way the convertible feature works is that investors have an opportunity to provide us with a conversion notice, after which there's a 20-day period where we look at the stock price and determine -- a 20-day trading period, I should say -- where we'll look at the stock price, and then assess how many shares would be converted.

Given the optionality that convertible investors would be giving up by doing that argues that it's unlikely that investors would convert the stock. Our view is that they would probably hold it to maturity. At maturity, we would provide investors with cash up to the face amount, and then shares to the extent that the stock is traded above $22.43. Keep in mind that we did purchase a call spread at the time. So the Company is protected from dilution until the stock reaches a point of $29.04.

Okay. Great color there.

And can you also talk about the -- I guess I can look in the Q, but do you happen to have the multiple that you guys applied to the first quarter purchases?

The multiple for the first quarter purchase was 2.1. As you know, Hugh, we are very conservative when setting the initial multiples. As you can see from the 2009 purchasers, we started those at a relatively low multiple and over time have increased those to 2.6. So we start low, we see how we perform quarter-over-quarter, and then increase it over time.

Okay.

And I was kind of hearing that some of the tax refunds out of Washington were, maybe, a bit delayed because of some weather issues towards the beginning of the year. Was wondering if that's something you guys saw, and whether or not, maybe, in April you guys were seeing more than normal kind of spillover because of that.

It would be hard to isolate any impact or spillover. I believe the issues were largely cleaned up pretty quickly. And so, my guess is the tax impact occurred in most of the first quarter and is something you'd see spill over to the second quarter.

Okay.

And I guess you guys talk a little bit about the success that you're having in India, whereas by comparison, a company like NCO that has ventured there, and has stopped hiring there, and taken maybe a different approach with that business -- they haven't found the success that you guys have. Can you talk about maybe why you guys are seeing that success there as opposed to some other people that may not have?

We certainly can't comment on anyone else's experience. I'll talk more about ours. But we think there are a series of decisions we made that allow us to be successful there. But one key difference is we have the luxury, since we buy the portfolios, of investing greater dollars, in terms of how we compensate our employees, than an agency might be able to. So the function -- we think it's a function of giving complete access to all of our accounts, rather than working just the lowest-value accounts. It's paying people incredibly well for the value they contribute. And the leadership team we've built in India is completely an Indian team; it's not a series of expats that have gone over there to run it. And so we think we've got a fantastic leadership team over there that -- combined with the right kind of hiring, the right kind of training, the right kind of compensation -- has led to a -- really, a great success over there.

And the last question I have before I jump back into the queue is -- you just talk about -- obviously in the fourth quarter, you guys moderated your purchasing. Can you talk about purchasing competition in this quarter versus prior, and kind of the underlying characteristics of the receivables that you guys are seeing now, relative to the depths of the recession, and kind of during better economic times?

Sure. So in the fourth quarter, our purchasing levels were slightly lower, partially driven by the fact that in the third quarter we did a very large purchase that we wanted to make sure we could assimilate into the system and work it. The fourth quarter is also a time when many of the flows are bid. And so part of our first quarter results are the fact we secured some flows, but also just buying in the open market.

In terms of competition in pricing -- we continue to see fairly low levels of competition, as many of our competitors don't have the capital to deploy, although pricing has maintained levels that have not gone up slightly. And [think] the banks are doing a good job of managing how much supply gets in the system. But there's plenty of supply, limited competition. And what you saw this quarter was partially a seasonality effect.

Thank you very much.

Mark Hughes, SunTrust.

-- call.

The portfolios in India -- I think you had suggested that you were opening up more of the accounts for the collectors to take a crack at. Will that change the shape of the curve? Would we expect those collections to drop off a little faster?

I don't think so. What we've effectively done over time is view what we're doing in India just like any other call center. And so there's actually no segmentation between accounts work domestically and in India. What you should expect is continued strong performance and, as Paul mentioned, a continuing lower cost to collect of those. I don't think you'll see any adjustment in the curve, other than we probably have the ability to extend the length of the curve, the life of the curve, a little bit longer, because we can work, at the margin, less collectable accounts in India that we couldn't work in the US. But that's probably kind of adding area under the curve at the tail rather than adjusting anything at the beginning.

Right. The $0.09 on the dollar to collect seems very striking. What are the plans for expanding that call facility? You're obviously getting very good returns there. Can you double it? And can you do it with this same cost efficiency?

So we can grow, as Paul mentioned, to slightly over 1,000 call center employees. And then we kind of fill up the facility, maybe we can go to the 1,200 or so. And then, we would just make a decision at that point to move to another facility or add a facility. It's our belief that we can easily double the number of the collectors we have and well beyond that, just applying the same principles that have worked so far. So barring something we don't see, we believe this cost advantage will only increase over time.

Right, it's at $0.09 on the dollar. Sure, there might be some expansion costs, but there's no reason that's artificially low, you wouldn't say, at this point?

No, we wouldn't. As we add, we can marginally bring that number down.

Right.

And then, legal expenses -- I don't think you -- there's not as much upfront legal spending going on. Does that stabilize at some point? What's the trajectory there?

There are a couple of things on the legal side. One is that, as we mentioned, last year at our Investor Day, we've put in place a legal model which enables us to sue fewer accounts and still generate the same level of liquidation. So we'd be getting more precise in who we sue, which has resulted in improvements to cost to collect. And there's also some timing relating to when we sue accounts. So this quarter, we happen to have fewer accounts that we sued. And that will fluctuate from period to period.

So over time, our legal cost to collect will come down from historical levels because of the refinement in our suit strategy. But they will fluctuate depending upon volumes. Q1 was a lower-volume quarter than we've experienced in the last two or three. And as we continue to grow our purchasing, we can expect the volumes to increase, but with the more refined approach.

Thank you very much.

Thank you.

Rick Shane, Jefferies & Company.

Hi, thanks for taking my questions. And it follows up on a previous question.

So when we -- help us understand the relationship between the balance sheet asset of deferred court costs, which is the capitalized funds that you -- capitalization of funds that you have advanced to lawyers, and the court's cost advance expense in the Q, which is basically reversing that capitalization, running that capitalization through the P&L; and the relationship between those two metrics and the expectations on collections. Because when I look at it, for the quarter, the balance sheet asset didn't change a great deal. The collections were consistent with last year, and the expense was substantially lower. And I understand that a lot of that reflects, I assume, your refined strategy and what you're saying is going to be greater efficiency there, which is why you expense less?

And again, this is a little bit open-ended, Brandon. If you can sort of continue this thought for me, and just make sure that we all understand this fully, that would be incredibly helpful.

Since that's a detailed accounting question, I'm going to let Paul go with that.

The way it works, Rick, is that we -- when we spend a dollar on court costs, we defer the portion of that dollar that we expect to recover. And that deferral rate is based upon our experience across every account that we've ever sued over the last six or seven years. We refine that estimate of what we expect to recover every single quarter.

And so, what gets expensed in any period is based upon two factors. One is the volume of accounts that we sue, and the second is the recovery rate on those accounts, our expected recovery rate on those accounts.

So the expense during the quarter is lower this period, primarily because of the volume decline in accounts that we've sued. And the volume decline is related both to our refining the approach and being able to sue less, and still generating the same level of collections, and also is based upon our purchasing activities and how much we sued during the quarter, because of the volume of accounts that go through that channel. Ultimately, we -- at a certain point in time after three years, any court costs that have not been recovered we write off. And if we do get recoveries after that, they basically go directly to the expense.

I don't know if that answered your question or not, but that's basically how it works.

Okay. Yes, that helps. And to follow up on this -- the suggestion is that legal collections will continue to be strong, roughly, at these levels, and that expenses will -- expenses were unusually low this quarter? Is that what we should take away from this at this point?

Yes. Expenses were low this quarter because of -- driven by volume. As we -- we did say that we will -- you can expect to see legal collections be a higher percentage of our overall collections. And with that increase in volume, there will be increase in overall cost to collect, although the cost to collect in the legal channel will continue to improve.

Okay.

And last question -- I promise my peers, I won't belabor this any more than this -- but help us understand the timing differential between when those expenses are incurred and when the collections are incurred, or generated.

The expenses incurred in the court costs happen immediately. The collections happen starting six months after the spend, and continuing on six, nine, 12 months later.

Terrific, thank you. I apologize for all the long questions. Thank you.

Thanks, Rick.

Bob Napoli, Piper Jaffray.

Thank you, good afternoon.

A question on your impairments -- which years are the impairments in? And I'm not sure if you've mentioned that but I didn't see it.

They're largely in 2006 and 2008, and the third vintage year with the highest level is 2007. So 2008, 2006 and 2007. We do have a table in the 10-Q, which we filed earlier today, which shows the impairments by vintage year. That's on page 21, I believe, of the 10-Q.

Okay. And as you look at impairments, have you -- you're booking -- first of all, do you have only four pools per year? Do you have one pool per quarter?

We do.

Okay. And you're putting these on the balance sheet at relatively low valuations. Do you feel like your risk of impairments are very low for 2009 and forward? And where do you see additional impairment? Where would you expect additional impairments to come from -- the same pools that you just impaired?

I would say that 2009 and beyond, we've definitely been very conservative. And so while I would never say never, we wouldn't expect to see impairments coming from those pool groups. I think in the future, we would largely see impairments coming from the same ones [where] we've recently experienced some allowances.

Okay.

And then, on the regulatory side, where -- can you -- where do you see the biggest risks on adjustments? And if you could mention, maybe even by state? What are you most concerned about? And what is going to have -- what, that's already passed, is going to have the biggest effect on your business?

We don't think, actually, anything that's been passed is going to have a huge impact on our business. Most of the things passed so far are procedural in nature. And they come out with some regularity, although there hasn't been much change. There's implementation of a statute in New York City that occurred over the weekend, actually, where the requirements of information you need to provide to pursue collections are greater than they have been in the past.

But I think for the large buyers, the more sophisticated ones, the ability to handle these requirements is -- while sometimes labor-intensive, they're easy for us to handle. I think the challenges [are] going to be faced more by the smaller buyers, who don't have the technology or the compliance, or the regulatory infrastructure to deal with those types of issues.

So quite frankly, we haven't seen anything meaningful that's been enacted. We're mindful of the fact that can change in any given period of time. The one theme that was occurring at one point last year was a movement to reduce the statute for litigation. And if you recall, last year we shifted our purchasing to move up much closer to the fresher end of the spectrum, to allow us as long a runway as possible with those, if that legislation were to come to bear [or] if it had not.

So right now, we're aware of a lot of discussions that are underway, but there's nothing that's imminent or in front of us that we worry about.

Great.

And just last question -- your bankruptcy servicing business -- that is -- what is that related to?

So we own a company down in Texas, called Ascension Capital Services. That company provides bankruptcy management services for large financial institutions who have secured consumers or secured accounts that go to bankruptcy. Historically, it's been mostly in dealing with consumers who have a car loan or a car, and go into bankruptcy, and we facilitate that process for the banks. It's a fee-per-service business.

Recently, we've expanded that into the mortgage business. And we actually have a fair amount of excitement around Ascension. And in our Annual Day, it's our intent to talk about it much more specifically than we have in the past. But it hasn't been material up till now. But as we sit here today, we feel like there's some really good prospects that could make that a very material part of what we'll do in the future.

Great. Thank you.

Thanks, Bob.

Sameer Gokhale, KBW.

Hi. Just a couple of questions, Brandon.

Firstly, I hopped on a little late, so maybe I missed this. But I just wanted to get some sense for what you're seeing in terms of the health of consumers broadly. I know you talked a little bit about how you buy paper that used to be debt for superprime customers, all the way down to subprime. But is there any insight you can give us as to what you're seeing, from the standpoint of consumers? Is their health improving at this point? Or do you still not have as much visibility at this point?

The good news, from our perspective, is the health of our consumer has been consistent over the last few years. So we see payer rates, average payment sizes, broken payer rates, all very consistent with the last few years. The continued [and] only impact we've seen is the shift away from one-time settlements to the multi-payer strategy that consumers are employing to repay their debt. But from our vantage point, the consumers we deal with are not experiencing -- didn't experience much downward pressure and aren't experiencing great upward pressure. But they've been fairly constant, if not slightly up, which gives us great confidence in our models.

But is this something you can glean from your customer base to -- or your debtor base to the broader population? You hear some commentary from the card companies about what they're seeing in their portfolios. We still see the high unemployment rate. Are there any leading indications that you can point to, to say okay, well, we think the consumers [is] improving, and there's some early indications of that? Or is it just not possible to read more broadly into the health of your customer base?

I think that's the answer. I think it's hard to apply what we see in our consumers to the broad consumer base.

Okay.

And I'd be completely speculating.

Okay, that's helpful, because I've heard some people say that you can, and others say you can't. So I just wanted to get some sense.

The other question I had is, in terms of your legal costs -- and you did talk about this, and it's in the -- you've mentioned in your 10-Q that you've gotten better, basically, figuring out which accounts to sue. But as we look at the ratio of your expenses in your legal channel to cash collections, how much further -- I know your hope and goal is probably to improve that ratio -- but how much lower can it go? Or have you picked the low-hanging fruit there, and you're pretty much done with the improvement in that ratio?

We continue -- as you know, Sameer, we continue to refine our models year after year. And as we get more information and more data, we'll continue to be more precise in determining who we sue and when we sue them. So there's clearly room for improvement in our recovery rate on court costs. And we don't have a number to guide you on in terms of what the floor is, but we'll continue to make improvements to that year-over-year.

Okay.

And then, just my last question -- you have this expansion facility available to you, should you choose -- or the accordion feature, should you choose to use that. But when you think about leverage in the Business, and you look at -- right now, you're at, I think -- if I did my math correctly -- about 1.3 to 1 debt-to-equity. And if you expand that facility, you probably get to the 1.7, 1.8 times. Is there a targeted level, again, of leverage that you think you can run the Business at longer term, assuming the current markets continue to show improvement or remain stable? Or do you anticipate being at 3 to 1 or higher at some point?

The way we look at leverage is primarily based upon what we've got in ERC, and what we -- and the debt level that we have. So today, we've got $1.2 billion of ERC on $300 million of debt. So in terms of net collections coming from that ERC, we are more than two times collateralized on our debt level. So we feel very comfortable increasing that.

And that's -- we look at that when looking at debt levels; we also look at our cash flows. So today -- or this quarter, we generated more than $80 billion of free cash flow. Again, if you annualize that, we're basically generating enough cash flow today to repay our entire debt load within a year. And those are really the two metrics that we track -- we look at when determining what level of debt we should have.

So right now, we feel comfortable with what we have. We also feel comfortable taking down the full amount of the accordion, if we chose to do that, and still feel very comfortable with our debt level. Keep in mind that if we did take down the accordion, it would be to purchase additional receivables. So our ERC would grow, and our cash flows would grow as well. So right now, we're not at the point where we have any concerns about debt levels.

Terrific.

Well, thank you very much again for the commentary, I appreciate it.

Sure.

Justin Hughes, Philadelphia Financial.

Good afternoon, and thank you for reinstating the Conference Call. Seems like there's an awful lot of interest.

You're welcome.

My first question was on -- your monthly IRRs reported in your 10-Q was 5.3%. And that's flat with last year. If my numbers are correct, that's the first time in several years, year-over-year, that that number has not been down. Have we reached an inflection point, where we can see that number at least stabilize or, God forbid, maybe move up year-over-year going forward?

I think we have reached the point where that number has stabilized. As I mentioned before, we are conservative when setting our initial curves and our initial IRRs. And I think as we have experience on the 2009 and 2010 pool groups and increased the expected collections in the IRRs, what you fear may happen.

Okay. Excellent.

And then, my second question is on your India capacity. We talked about this a little bit. But your headcount -- you guys kind of warned us last year that there was going to be a step up in expenses, and that then you'd be filling in the capacity in India, and you delivered on that. We had collections up $15 million quarter-over-quarter, and expenses were only up $1 million quarter-over-quarter. You're at about 1,000 employees now in India. How much more can you add before we need to see another step up in expenses?

I think the answer's going to be about 50% more in terms of headcount.

Okay.

And the step up will be acquiring a new facility. That's the step up. And that learning curve -- the good news is that this growth we've seen and the additions we've made over the last six months -- we fully expect those employees to be -- to not be completely up the collection ramp until later this year. And so even if we got to that point, we'd have a significant number of people contributing well beyond where they are today. And so I think the impact would be much less pronounced than it was last year.

Okay. Are you looking for additional facilities now? Is that something we should think about as a late '10 event, or is that an '11, or even further?

In the facility that we're in, in India there, we have the ability to expand into adjacent space. That could occur late this year. But any additional facility will probably be a 2011 event.

Okay. Thank you, that's all the questions I had.

Thank you.

Larry Berlin, First Analysis.

Afternoon, guys. And again, thank you for the call, appreciate it.

You're welcome.

One quick question -- could you guys give a little bit more detail and a little bit more commentary on how the 2009 debt is performing? And given your conservatism in setting yields, how do you view the chance that the yields might have to go up on 2009's purchases?

Larry, as you're aware, and others, we do provide in the 10-Q our forecast of future collections by vintage year. So if you've been tracking that since the beginning of 2009, you'll see that we have over-performed on our collections -- on our collection expectations for that year. When we reset curves, we also do that with the level of conservatism. And our hope is that if we increase expected collections in our curves, that over time we will continue to over-perform those and, if warranted, will adjust them. So when we do make adjustments, we don't do it all at once; we do it over time, once we can determine that we're comfortable that we will not only meet but exceed those expectations.

And there was -- to that point -- there were increases in the 2009 vintage in this quarter.

Yes. And you'll see that when you look at that table in the MD&A.

Great, thank you very much, guys.

Thank you.

Edward Hemmelgarn, Shaker Investments.

Have just a couple of questions.

One -- you and others have talked about the move from lump-sum payments to payment plans. About how many -- how long of a time period, on average, are people opting out [for] the payment plan? Is it six months, a year, or two years, or what?

It's tough to give an exact answer, because it really varies by balance range. And so the higher the balance, the longer the payment plan. But you could think about it -- the person who was paying us one lump sum is probably not paying us over a six- to 12-month window, instead of the one payment.

And I think one of the important things, Ed, also to keep in mind -- and we showed this data last year -- was that the percentage of our consumers who are paying in lump sum represent less than 10% of our total consumers. So even though more are paying over payment plans than in lump sum, it doesn't have a significant impact on our overall collections, since most people are paying with payment plans, anyway.

Okay, when you start one of these payment plans, what's the percentage of debtors that end up completing the payment plan process? Or is there a significant falloff?

About 80% complete their plan. And that number's actually been getting better over the last year and a half.

Okay, great.

Lastly, then, what was your interest rate going to be on your new line of credit?

It's LIBOR plus 250. I mean -- I'm sorry, LIBOR plus 350 to 400, depending upon where we fall on the grid.

Okay. And it had been --?

It went up about 125 basis points.

About 125, okay.

Okay, great, thanks.

Mark Hughes, SunTrust.

Thank you.

Just a final question on the India operation -- is that facility more suited to a particular type of paper? Or are you -- could you use that for just about anything that you might use in your domestic collection sites?

We actually can use it for any type of paper. We're working all balance ranges, all portfolio types, all vintages in India. The one thing they can do exclusively, as I mentioned, are the accounts where at the margin the cost to collect domestically would be very high. They have a broader base they can use there.

And then, one final question -- you had mentioned that the banks were doing a pretty good job in terms of maybe not selling too much paper or keeping the market -- not flooding the market. What's your thought about how much paper they've been holding back that historically they might have sold? And when does that start showing up for sale?

It's a great question. It's a meaningful number. I would put it in the tens of billions of dollars of unsold portfolios now working its way through some part of an agency cycle. We've seen some of that come to market very recently. We expect over time all of that to ultimately come to the market. And in our view, that just prolongs the buying opportunity for years to come. So we believe that it will come, and it'll be combined with whatever charge-offs are happening in the moment, and then, the sale of these accounts that have gone through the agency cycle. But it's beginning now, and it will likely continue for the next couple years.

Thank you.

(Operator instructions) Hugh Miller, Sidoti.

Actually, the question was asked and answered.

One housekeeping question -- we're seeing that uptick in the other operating expense line, about $9 million in the first quarter. Can you just give us any sense as to what was kind of driving that?

A lot of that relates to mail. And Q1 is typically a very heavy quarter for mail, given seasonality. We try to maximize what we're able to collect through our direct-mail campaigns and programs. So that's the bulk of what's in that line item.

Okay, yes.

(inaudible)

Because it has been trending up, I think, for every single quarter [of the route]. So there's probably some other things that are kind of lumped into that. But we would anticipate that with a moderation in some of the mailings, given the seasonality of the business, that that would kind of taper off a little bit later in the year.

Yes, typically, it does. We also include -- there are also data costs in there, as we refine things, in terms of the models. We are spending more on data, which we believe is resulting in higher collection levels. So it's going to depend -- from a seasonality perspective, you're right, in terms of mail. But there are other things in there. If you look the MD&A, we give a pretty detailed description of what makes up that line item.

Okay. Thank you very much.

I'm not showing any other questions in the queue at this time. Did you have any closing remarks?

I wish just to thank everybody for joining us today, and we look forward to speaking with you at our Annual Investor Day in June. Thank you very much.

Thank you.

Ladies and gentlemen, thank you for your participation in today's Conference. This does conclude the Conference. You may now disconnect. Good day.