Encore Capital Group Inc (ECPG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Encore Capital Group Third Quarter 2010 Results Conference Call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Ren Zamora, Director of Finance. Sir, you may begin.

Thank you, operator. Good afternoon and thank you for joining Encore Capital Group's third 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 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. Management utilizes adjusted EBITDA, which is materially similar to a financial measure contained in the covenants used in our credit agreements, in evaluation of its operations and believes that this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of receivable portfolios.

We included information concerning total operating expenses, excluding stock-based compensation expense and bankruptcy servicing operating expenses in order to facilitate a comparison of approximate cash cost to cash collections for the debt purchasing business in the periods presented. 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, which can be found as an exhibit to our periodic report on Form 8-K, filed with the Securities and Exchange Commission today or at the Investor Relations section of our website, www.encorecapitalgroup.com, contains a reconciliation of adjusted EBITDA to reported earnings under GAAP. A reconciliation of operating expenses, excluding stock-based compensation and bankruptcy servicing operating expenses to the GAAP measure, total operating expense and a reconciliation of tangible book value per share to the GAAP measure total stockholder equity.

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. I appreciate everyone joining us on today's call and I'm very pleased to report that this quarter was once again marked by record-setting financial results. Despite what is often a seasonally-challenging period, our third quarter results demonstrate our ability to both profitably deploy capital and produce strong financial results.

We believe that our continuing success is driven by our significant investments in data (inaudible) talent, our expertise in understanding and predicting distressed consumer behavior, our accelerating profit advantages and our commitment to conduct business ethically and in ways that support our consumers' financial recovery.

We collected $157 million during the quarter. Not only is this a 25% increase compared to the same period in 2009, it is also the most we have ever collected in a single quarter. Our consumers' payment behaviors continue to be consistent with level of experience in prior periods and are well within the expectations of our models.

Payer rates for the quarter were 12% higher than 2009 while average payment size is steady at approximately $215. And consumers on payment plans continue to honor their arrangements at increasing rates.

Our operating cash flow for the quarter or adjusted EBITDA was $90 million. This is a 28% increase from the third quarter of 2009. Our ability to grow cash flow at a faster rate than collections is largely driven by improving operating costs. During the third quarter, our overall cost to collect was 43.9%, down from 45.4% during the same period in 2009 and well below the 52.2% we reported 2 years ago. The strong cash flow has allowed us to invest $78 million in new portfolios, while only increasing our net debt by $5 million.

As many of you know, we have been examining alternative asset classes and geographies in an attempt to broaden our purchasing reach and leverage our competitive strengths. One such asset class is the bankruptcy receivable market. We delayed entry of this asset class until we were confident about the liquidation of unsecured accounts in the post-bankruptcy reform period. We ultimately became comfortable this quarter and spent $8 million to purchase bankruptcy portfolios from 2 different issuers. We have also agreed to purchase an additional $5 million of bankruptcy paper, most of which will occur in the fourth quarter. These purchases expand our reach into the bankruptcy space and complement our fee-based, secured bankruptcy business, Ascension Capital. We plan to continue purchasing bankruptcy receivables in 2011, but expect these purchases to account for less than 10% of our total purchases.

Turning to the current market, we have started to see prices for portfolios increase. We believe this may be a result of a number of our competitors gaining access to additional capital and becoming more active. As there are typically less supply during the third quarter, this increased demand led to higher prices. While we expect pricing to remain higher than it was during 2009 and early 2010, we believe that we will be able to continue to buy portfolios at attractive returns and we plan to meet or exceed our 2010 purchasing goal of $300 million.

In the third quarter, we have purchased in excess of $240 million or 81% of our goal.

Let's move forward to 2011. We believe that supply will be higher than it was in 2009 and 2010, as pricing is now above the floors established by the issuers. As such, the combination of increase in supply and our entrance into the bankruptcy market should allow us to increase purchasing levels into next year.

We fully expected that the supply, demand and balance we experienced over the past few years would eventually normalize. Accordingly, we have continued to make investments in both consumer level analytics and our Indian call center facility, which enables us to bid competitively despite increases in pricing. We have steadily expanded our operating capacity in India, where we now have 1,200 employees, up from 660 this time last year.

We have also made improvements in identifying which consumers are able to repay their accounts, allowing us to better predict payers and limit time and money spent on those accounts that likely their payment is very small.

Let us change gears and talk about the political and the regulatory environment. For some time now, policymakers have focused their attention on our industry, both at the state and federal levels. Recently, legislation has been introduced that proposes changes to the Fair Debt Collection Practices Act or FDCPA. As we have said previously, we support efforts to modernize our industry through the application of well-informed policy. Not only will this enhance consumer protection, it will also encourage a marketplace that benefits responsible, ethical and sophisticated firms. We are convinced that the goals of regulators, law makers and the debt-buying community are largely aligned and we believe strongly in defining and defending the rights and responsibilities of consumers and corporations in our industry.

This year we have initiated a number of activities designed to address these problems. To begin with, we are transforming our consumer relations department in an effort to establish a new industry standard. Included in the plan's enhancements are increased staff and infrastructure, devoted to responding to and resolving consumer matters. The newly-enhanced group reports to Ron Naves, our General Counsel, who has a significant amount of consumer experience and has worked in the past as an Assistant Attorney General for the state of Connecticut.

Moreover, we have partnered with a number of consumer advocacy groups to draft guidelines for our interactions with our consumers. These guidelines will explicitly define the conduct our consumers should expect from both Encore and its agents. Ultimately, we plan to establish and maintain an industry leadership position in the domain of consumer affairs and we are committed to fair dealing in all aspects of our business.

As we work with consumers to help restore their financial health, we have a number of accommodations that we can offer them to satisfy this obligation within their financial means. From discounts to payment plans to hardship solutions, we strive to partner with our consumers as they attempt to return to financial health. We always prefer to speak with our consumers directly and work with them to creating arrangements that retires their accounts. Unfortunately, too often we don't have the chance. That is because only 6% of our consumers respond to their letters and only 18% of our consumers respond to the calls we make. As a result, we are left with the undesirable option of using the court system, which is the only other remedy available to us.

Before that option is even considered, we applied several quantitative and qualitative processes to each account. Specifically, we have built a legal selection model designed to identify consumers who possess the financial means to repay their obligations over time. We also have a dedicated team of collection account managers that make additional attempts to reach the consumer to alert them to the possibility of future legal action. This approach is not only responsible, it is also good business as it allows us to avoid unrecoverable legal costs. As you are aware, we must advance court costs and fees at the time of filing a lawsuit. We lose money each time we do that and that are ultimately unable to collect. Said differently, we have absolutely no incentive to pursue litigation against the consumer who cannot repay their debt and we are working hard to avoid having this happen.

In summary, we continue to look for ways to anticipate and benefit from the changes occurring within our industry. We have been able to take full advantage of the recent favorable pricing cycle and continue to enhance an operating platform that will allow us to drive significant growth.

With that, I'd like to turn the call over to Paul to review our results in more detail. Paul?

Thanks, Brandon. Before discussing our results for the quarter, I want to highlight a few of the positive changes that we recently made to our capital structure. Earlier in the quarter, we successively closed on $33 million of additional commitments under our revolving credit facility. We followed that up with amendments that improved several key provisions. We reset our accordion feature, giving us the flexibility of raising an additional $100 million in new capital and we extended the maturity from May 3rd, 2013, to December 31st, 2013. In addition, we increased our maximum leverage ratio to 2 times adjusted EBITDA, up from 1.75 times.

We were also pleased to announce that we raised $50 million through a private placement of senior secured notes with Prudential Capital. From a shareholder perspective, we believe that this private placement was an important step forward for our company because it lowered our borrowing costs as compared to the convertible bonds which we acquired in September and strengthened our overall financial position. Not only did the private placement notes of 7.75% have a lower overall cost to our P&L when compared to the convertible bonds effective interest rate of 10.4%, it also lengthened the duration of our liabilities and reduced our dependence on the syndicated loan market.

Additionally, this transaction was industry leading as we are one of the few companies in our sector with the ability to access this market of what we feel are favorable rates. We believe that the private placement market will be a future source of incremental, medium-term capital and we are very excited about partnering with Prudential, a market leader with more than $50 billion invested.

In addition to the amendments to our credit facility I discussed earlier, we also negotiated the ability to raise an additional $25 million of private placement notes from Prudential without seeking additional approval from our facility lenders. These changes provide us with considerably more financial flexibility and the ability to increase our total debt capacity to more than half a billion dollars to both support our increasing purchasing goals and to pursue new, strategic initiatives.

Turning to the metrics that we monitor most closely to evaluate our business, we had a very strong quarter. Collections were 115% of our forecast. Operating cash flows grew at a faster rate than collections. And we significantly increased the embedded value of the company with very little incremental leverage.

One of the most relevant metrics we focused on is adjusted EBITDA, which reflects our ability to profitably liquidate portfolio and generate strong cash flows. This represents the cash flow we generate that is available for future purchases, capital expenditures, debt service and taxes. For the third quarter, adjusted EBITDA was $89.7 million, an increase of 28% compared to the $70 million reported in the third quarter of 2009. This improvement in cash flow allowed us to deploy $77.9 million for portfolio acquisitions in the quarter and pay $6.4 million in cash taxes while only increasing our total net debt outstanding by $5.1 million.

Another metric that we pay close attention to is our cost to collect ratio, which was 43.9% in the third quarter of 2010 compared to 45.4% in the third quarter of 2009. This 150 basis point decrease is a key driver in our ability to be price competitive, which we believe will enable us to increase our purchasing levels in the future.

Looking forward, we expect cost to collect to continue to decline over time, but it may fluctuate from quarter to quarter, depending on the contribution by collection channel and overall collection volume. Please refer to the table on page 26 of our 10-Q that describes our cost to collect by collection channel to get a better understanding of historical fluctuations.

The third metric that we track is the value of our existing portfolio, which is reflected in our estimated remaining collections or ERC. In addition to record collection performance, we have also been able to significantly increase our company's embedded value. Over the last year through September 30th, 2010, our ERC increased $104 million to $1.29 billion. Notably, our net debt increased by only $6 million during the same time period.

In fact, our leverage ratio continued to decline to 1.02 times at the end of the third quarter of 2010 from 1.3 times at the end of the third quarter of 2009. These results demonstrate the advantages provided by our operating model and validate our conservative approach to financial leverage.

Moving on to other financial results for the quarter, collections were the strongest in the company's history at $157.4 million, up 25% from $125.7 million last year. We are extremely proud of our team for achieving this milestone, especially since the third quarter is typically a slower quarter for collections. Our call centers contributed nearly 43% of total collections of $57.1 million for the quarter compared to $45.1 million in the third quarter of 2009. As a result of our significant growth in call center headcount, particularly in India, we expect continued growth in call center collections through 2011. We now have approximately 900 account managers at our India site. As we mentioned in our last call, many of our newer account managers have been with us for fewer than six months. And as they progress through their training and development programs, we expect to see improvements in overall call center productivity and cost to collect.

In total, we employ nearly 1,200 professionals in India and we achieved that ahead of schedule.

To support our continued growth in India, we have recently secured space in the building adjacent to our current facility and expect to expand our workforce over the course of 2011. Since the growth in our headcount has important implications to our overall costs, we have included a table on page 35 of our Form 10-Q, which shows headcount by site.

Legal channel collections grew to $71.8 million this quarter as compared to $55.6 million in the third quarter of 2009. This represented 46% of total collections.

Cost to collect in the legal channel was 47.2%, up slightly compared to 46.9% in the third quarter of 2009, primarily due to increased court cost expenses. The remaining 11% of collections came primarily from third-party collection agencies. Agency collections decreased to $18.1 million from $19.7 million in the prior year reflecting changes in our operating strategy where we continued to ship more of our work internally as capacity comes online in India.

Finally, as it relates to collections, during 2009 and through the third quarter of 2010, we have not experienced the typical seasonality of our business where collections decline in the third and fourth quarters. To remind you, the main driver for the normal decline in collections relative to the third quarter is that in the fourth quarter our consumers tend to allocate more of their resources to holiday activities and events. We expect that the fourth quarter of 2010 will be impacted by our industry's typical seasonality factors. In addition, our collections in the third quarter were positively impacted by a calendar nuance as we had 14 weekly remittances from our law firm and agency partners as compared to the typical 13 weekly remittances, which we will have in the fourth quarter. The extra remittance added approximately $7 million to Q3 collections.

Moving on, our revenue from receivable portfolios was $93.8 million, an increase of 23% over the $76.4 million in the third quarter of 2009. As a percentage of collections and excluding the effects of allowances, the revenue recognition rate decreased slightly to 63.5% from 64.3%. The reduction in the revenue recognition rate is attributable to our conservative approach to setting initial IRRs and our policy is increasing them gradually after periods of over performance.

During the third quarter, we increased IRRs on pool groups where collections significantly over performed our initial expectations. So we continued to maintain conservatism when establishing estimates of future collections from these pool groups.

Looking at our portfolios as a whole, we collected 115% of our budgeted collections in the third quarter but there were certain pool groups where we collected less than our forecast. As most of you know, we account for the business on a quarterly pool basis, not in an overall level. This pool-by-pool level accounting treatment leads inevitably to non-cash allowance charges in certain periods. Thus, during the quarter, for some pool groups, we reduced our expectations on future collections, which led us to record $6.1 million in net allowance charges compared to $4.3 million in the third quarter of 2009.

At Ascension, our fee-based bankruptcy servicing business, our revenue for the quarter was $4.1 million, up 5% from the $3.9 million recorded in the prior year.

Turning to expenses, our total operating expenses were $74.3 million, up from $61.5 million in the prior year. This was an increase of 20.7% compared to the 25.2% increase in collections. Included in operating expenses were stock-based compensation expenses of approximately $1.5 million and operating expenses of $3.7 million for Ascension.

Finally, our fully diluted earnings per share of $0.49 compared to earnings per share of $0.37 in the same period last year, an increase of 32%.

With that, we will 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.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from Mike Grondahl from Northland Capital.

Yes, thank you, guys, for taking my questions. The first one really gets at some of the new paper you bought in the September quarter. How would you extrapolate kind of your expectations for that paper versus the paper you bought in the couple prior quarters? And then secondly, Paul, on the allowance, the $6.1 million, can you just kind of help us reconcile that against the collections being 115% of forecast? I mean it seems like you almost built in some more conservatism to the portfolio. But just kind of help us reconcile that a little bit. Thanks.

Sure, in terms of purchases for the quarter, other than the bankruptcy purchase, the bankruptcy receivables which we talked about, the purchases were pretty similar to what we've been buying over the last few quarters, so there's not a lot of differences there. The bankruptcy purchases tend to have a lower multiple, so rather than collecting in the mid 2's in terms of multiple, they're typically in the high 1's, although the cost to collect is much lower. So the IRR from those purchases is about the same as the IRR is for our typical purchases.

In terms of the level of the allowance charges and the collections being over budget by 115%, because we're accounting for our collections at the pool group level, we had in this quarter and we've had in other quarters the phenomenon where overall we've collected significantly ahead of our forecast. But there are certain pool groups where we collected less. So in those pool groups where we had allowances, we were at 100% of our forecast. We were less than 100% of our forecast. And as I mentioned, we try to be conservative and we did take some cash out of the collection curves for those pool groups, which had underperformed this quarter. All of that, the underperformance during the quarter and the cash taken out of the future periods, resulted in the allowance charge-- the net allowance charges of about $6 million during the quarter.

We, as you stated correctly, we are conservative in setting the IRRs. And because we did over perform significantly during the quarter, we did increase the IRRs on certain pool groups this quarter.

Does that answer your question, Mike?

Yes, no that helped and congratulations on a really nice quarter.

Thank you.

Thank you. Our next question comes from Mark Hughes from SunTrust.

Thank you very much. It looks like you're doing better on the 2010 paper than the 2009 paper, when you look at collections as a percentage of average purchase price. Your expectations for the 2010 paper are more modest in terms of your expected lifetime multiple. Is there some difference in your early collection strategy on the 2010 paper that is having it outperform earlier or is it just that you've being conservative?

This is Brandon. I think it's more the latter. I think it's us continuing to be conservative. We certainly have seen very strong performance on what we bought earlier this year. And it's not a function of a meaningful shift in operating strategy other than, as we've seen, our ability to bring on the resources in India, which are probably having a positive impact on our collections, certainly right out of the gate because we're just applying much more intensity than we have in the past. But I think it's a function of good performance and continued conservatism.

Right. The extra remittance in the quarter, the $7 million boost to collections, how much of that actually flowed through to revenue?

If you took the average revenue recognition rate, that's probably the best way to look at it. So if you look at the 64% that's probably what would flow through the revenue, Mark.

Right. Was it just in the zero basis revenue though?

No, there's probably very little. Since this is coming from our law firm partners and agency partners, it would be on portfolio that was newer, the zero basis portfolio are typically 2003 and prior. And most of these collections are coming from newer pool groups.

All right. So isn't that to say though that the extra collections wouldn't really affect revenue, cause they wouldn't affect the yields that you're applying?

So I think what Paul's answer is, it's hard to isolate the exact $7 million cause it's across every pool group. So on average, I think you just go with the revenue is what it was as a percentage and not particularly tied to any one dollar collected in the overage there. Said differently, the IRRs would have been the same with or without that $7 million. So you factor in future revenue, you should use the factor that we have in the Q to estimate that.

All right. So if the IRRs were consistent, then the extra cash shouldn't really have had much influence on revenue?

So the extra-- so the revenues will, as all of you know, the revenues are a factor of the book value of each of the quarterly pool groups multiplied by the IRR of each of those quarterly pool groups. And regardless of what the collections are for the period. So the revenue would be consistent as you're describing, Mark, and whether we collected $7 million more or $7 million less, it wouldn't impact specifically the revenue in the quarter. But to answer your first question, if you want to attribute revenue to collections, that was how I was answering your question initially.

Right. So as a general matter, you could-- you would assume that. But in this specific case, where you've got an extra I guess allocation of collections or an extra remittance, then it really shouldn't have affected revenue in this quarter. Is that fair?

That's correct.

Okay, all right. And then, I'm sorry what did you say that-- how much BK paper did you acquire in the period?

$8 million. We spent $8 million.

Okay and then one final, the tax rate, what do you expect for the full year?

The tax rate this year will be for the full year should be in the 37% range for the full year. We have the benefit of a tax holiday in India, which continues right now through the first quarter of 2011. And that provides us some benefit in the rate.

Great. Thank you very much.

Thank you, sir. Our next question comes from Hugh Miller from Sidoti & Company.

A couple questions, I guess, maybe starting off on some of the strategy with the bankruptcy paper. Was wondering what multiple are you guys applying into those purchases?

So, Hugh, on the bankruptcy the multiples, we haven't specifically disclosed what they are in the Q primarily because it's relatively insignificant to the extent that we will acquire more bankruptcy paper over the course of the next year or so. We'll provide separate disclosure for our bankruptcy purchases as compared to our traditional purchases. But the multiples on the bankruptcy paper are typically in the 1.7-ish range, 1.7, 1.8 range, depending upon the issuer and the specific portfolios that we acquire.

Okay and at what stage of the paper are you guys buying it within the bankruptcy process? Is it cash flowing at this point? Or is it not?

These-- we've looked at both type of transactions but the transactions we've bought so far are not cash flowing. So there is no revenue impact from those purchases in the quarter.

Okay and you guys-- I guess you mentioned that you kind of wanted to gain a comfort level with that. Can you just talk about how comfortable you are with kind of analyzing the trustee performance on that level and kind of being able to model that through, model out the collection expectations and obviously mitigating any type of inherent risk for this asset category?

Actually, we're very confident in liquidation and we've got the assets we've owned as a company and collected on. Ascension gives us a huge amount of information on liquidation of both the secured and the unsecured portion of bankruptcy. And what we are looking for was confirmation of this tale because, as you know, the law changed in October 2005. Much of the cash flow for unsecured receivables comes in the last half, two-thirds of the plan. We wanted to make sure we were comfortable in that. And now that we're kind of five years after the law, we got a lot comfort on what the close would look like.

Okay, I guess, can you just, as a follow-up tie in how kind of Ascension gives you a look through on the process for the bankruptcy proceeding through courts and performance on individual payer rates?

Sure, so Ascension manages consumers through the entire bankruptcy process for creditors. And so we're able to see the liquidation of the accounts they manage and other assets that are part of the bankruptcy plan for those individuals who are serviced by Ascension.

Okay, okay. And Brandon in Q-- for Q3 in the last conference call, you talked about how the kind of ramp up in headcount and some of the seasoning of the collectors in India would more than mitigate some of the seasonal pressures we typically see following the tax season in the third quarter. And you guys obviously did have a sequential rise in call center collections for your call centers. Can you give us a sense of whether or not you would anticipate how much of a factor, as we look into Q4 on a sequential basis, do you-- I mean obviously you'll have the $7 million less in the lawyers and agencies. But within the call centers, would you anticipate that you'll still see some benefit there on a sequential basis from the seasoning of India and that might kind of mitigate that pressure. Would you expect one to be greater than the other?

It's our current belief that seasonality will be greater than the benefit we'll get just because of the time of the year. And so we expect that comparatively quarter Q3 to Q4 we expect a decline in overall collections, just from a core process, absent the one-time effect. And you can go to the Q and sort of get a sense of where we think that number may be. If you look at our estimated remaining collections for this year, there's a fairly good number out there you can take a look at and add back with purchases and add back whatever factor you add back for conservatism.

Yes, okay.

It's on page 30 of the 10-Q for those of you who are interested.

And it seems if you look also at the portfolio yield and strip out some of the zero basis on the impairments that we not only had a year-over-year improvement in that yield but also I guess on the sequential basis an improvement when you strip out those other two factors. I guess can you talk about what might be driving that improvement in performance?

Are you talking specifically about the revenue recognition rates or are you talking about increases in multiples for portfolios?

The monthly IRRs. When you take a look at that, the monthly IRR that you report and then when you factor in, well maybe strip out the zero basis and the impairments which obviously can have an impact. And it seems like on a year-over-year basis they were up but they were also up on a sequential basis. Just trying to get a sense of why the monthly IRRS are kind of the strongest they have been?

Hugh, as I mentioned, for certain pool groups we increased the IRRs. So the way we're doing the accounting at the pool group level, once we set the IRRs, they don't go down. So we record allowance charges for those pool groups where collections aren't what we expected them to be. But the IRRs remain the same. And then for those pool groups where we're over performing, we've increased IRRs. So the IRRs, if we're increasing them at all, we'll always-- we'll only go one way, which is up. And because of the significant over performance on certain pool groups, we've-- the IRRs have gone up sequentially because we continue to over perform.

Okay. All right, thank you. And the last question was just with regards-- you guys obviously mentioned that you were having kind of a new consumer response department. How should we be thinking about that as a basis of expenses go forward?

I don't think you'll see it show up meaningfully in our expenses going forward. This is really our belief that we to-- the company respond as quickly and as efficiently as possible to consumer can challenge their disputes or complaints. And we've given a lot of additional resources to build that group up to make sure we're incredibly responsive to those issues.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Sameer Gokhale from KBW.

Hi. Thank you. In terms of the bankruptcy specialists that you have in India, it looks like there's an increase year over year. Were those bankruptcy specialists-- the growth in that was that because you were using more of them or plan to use more of them for Ascension or was this an anticipation of the increased purchasing-- the new purchasing I guess bankruptcy paper?

This is actually the buildup of employees for anticipated growth in Ascension. So in the fourth quarter, we will bring on some significant clients at Ascension and it's the increase in headcount to manage that growth.

So, can any of this bankruptcy paper be worked from India or the stuff you purchased or does it all have to be worked only in the US? Or can you use some of the Ascension staff to work some of this paper?

Actually we have the flexibility to work the accounts both with our Ascension team and with our team in India. As you build out and grow the business, I think you'll see headcount additions in all places, domestically both in San Diego and at Ascension and then ultimately in India.

Okay, so you should be able to get additional kind of economies from using more collectors there for that part of the business, which is kind of what I was trying to get at. The other question is do you-- can you share with us-- you gave us some information on the pricing trends for non-BK paper, as you folks see it, but as you've been studying the bankruptcy market can you share what pricing trends you've been seeing there, just to compare and contrast? Because as I understand it the pricing has gone up for the BK paper as well but perhaps not as much as you've seen on the non-BK side. So do you have any data that you can share with us on the BK paper as you've been studying the industry?

We've certainly seen an increase across both the bankruptcy paper and the non-bankruptcy paper. In terms of percentages, I actually think they're fairly similar. In the bankruptcy space, you do have competitors who come into the space and raise capital. And so it is a more competitive business and that's why we've guided to continue to be prudent in our purchases. To buy a portfolio where it makes sense but given the competition, we're not going to jump in and just buy a lot of portfolio at higher prices.

Okay. And then you're now diversifying the business BK buying space, leveraging your expertise it looks like from Ascension and then looks like you're buying some telecom paper as well. But at this point, I mean is your diversification plan going to be limited to buying different types of paper or I know at least one of your other competitors is diversified into other businesses beyond just collections. I mean is that on the map at this point or are you just not even considering getting into non-collections types of businesses at this point?

No, the contrary. We've actually looked pretty extensively at diversification both geographically as well as into other business lines. We've had a pretty good growth story as a company over the past few years, sticking to what we know best. And we think that's paid off for our shareholders pretty handsomely. But we recognize over time, we need to diversify and I would expect the company to do so in 2011 as well as growing our core business. So we will continue to look at doing other businesses that have felt like our capital is best deployed in our core business over the last few years, given the returns that we've been able to generate.

Okay and either one of those two things, either diversification or investing in the current businesses, you would consider probably a better alternative, at least in the near term to paying dividends or buying back stock essentially? Is that fair to say?

I think that's fair to say.

Okay. And then this is the last question, Paul. I haven't through the Q in a lot of detail but the tax rate. I know on last quarter's call you had mentioned that you expected the tax rate, if I recall correctly, would be somewhere around 39% for the second half of the year or maybe even for Q3. And then this quarter you came at 35%. And the guidance you gave us was 37% I believe for-- was that for the full year or Q4, I can't remember. But, it seems to be lower than what you had guided to previously. Is that-- what specifically is driving that lower guidance on the tax rate?

We had a couple of items that occurred in Q3. One was a refund of some-- some interest that was paid to us from the IRS on a prior claim that we had that we were successful with. Another was some state tax planning items that we-- that were fairly favorable to us and that we realized when we did all of our state tax returns and filed them in September. So there was a tax return to provision adjustment, which was very beneficial, which we took the benefit for the whole year or for the nine months of the year through Q3. So that was a one-time item. There were a couple of unique items in Q3 that we weren't sure what the magnitude was going to be when we talked about the rates in our previous call. And now that we're--we understand what those will be. The 37% is where it should be until we get to the point where the tax holiday in India goes away and then it will get closer to 39.

And when does that tax holiday go away for in India? I'm sorry.

Right now it's scheduled to go away at the end of the first quarter of 2011. It's been scheduled to go away in the past and they've extended it. Right now, there's-- we're not aware of any discussions to extend it beyond the first quarter of 2011. So we'll see what happens there.

Okay, all right. Thank you.

Thank you. Our next question comes from Justin Hughes from Philadelphia Financial.

Good afternoon. Just a quick question on Ascension. Revenues were down year over year, about-- actually they were up $200,000 but your expenses at Ascension were up $500,000. Does that relate to the bankruptcy paper you purchased or what's driving the expense growth in excess of revenue growth?

So, it's unrelated to the purchase of bankruptcy paper. And it's related predominantly to the addition of headcount in advance of the new clients coming on. So, one of the challenges you have with Ascension is as you bring on new clients, you have an increase in employee expense but much of the revenue is actually deferred for a period of time. And so you've got a mismatch there of revenue and expense. The expense you refer to is a good thing, in effect, which is it's allowing us to be prepared for the clients that will come on board in November and December.

Okay, so could we see margins go back to kind of the 20% next quarter, where they've been historically from the 10% in this quarter?

It'll probably be more likely that will take place in the early 2011. The way that revenue is recognized, depending on whether it's a Chapter 7 or Chapter 13 account. Sometimes revenue is delayed for 7 months once we have an account up until we record any revenue. So it's a longer period of time before we see revenue as compared to when we're adding headcount to serve that client that's placing those accounts with us.

Okay, thank you.

Thank you. Our next question comes from Edward Hemmelgarn from Shaker Investments.

I had one question. Regarding your guidance, you're talking about the current pricing. You talked about as how the pricing seems to be moving up a little bit, I mean stabilizing relative to last year. But it sounds like you're saying also the pricing is better or cheaper than it was, say back in '06, '07, '08 timeframe. Yet the multiples that your estimated gross collections to purchase prices don't seem to vary a whole lot relative to sum up the year of purchase. Can you kind of like give us some guidance as to what may happen down the road to this?

Well one of the challenges you have going across vintages is the gross liquidation multiple doesn't tell the entire story because you have some portions of the sales cycle at a lower multiple of just embedded in it because there's a lower cost side to it. So at the extreme when Paul talked earlier where we have a fairly low multiple, the bankruptcy portfolios in the high 1's, 1.7 and 1.8, but the cost to collect that is about $0.10 on the $1.00. And so very low cost to collect. You happen to get the same multiple. You'd see the same phenomenon between fresher receivables and older receivables. And in that window you talked about earlier, we transition as a company from older receivables to fresher receivables. And so that has an impact in it. If you go back a few years ago, you have sales as a part of strategy. Unfortunately, it's hard just to look at those numbers. I believe ultimately what you have today is even if we're collecting at the same multiple, if we strip it all out, we're doing it at 20% lower cost, which means we're getting a much more effective return.

Okay. Thanks.

Thank you, sir. Our next question comes from Hugh Miller from Sidoti & Company.

Just had one or two follow-up questions maybe on strategy. You guys had mentioned that kind of geographic diversification is something that you're maybe considering. Obviously, I would assume that's more on the debt buying business. I guess you have the offshore center in India, obviously would be pretty easy to service that. Can you just tell me if that's correct? And if so, maybe are there big differences from a legislative or compliance standpoint relative to the US business or is that kind of an easy transition for you guys to kind of look at?

You are correct. If we were to look geographically, it would likely be in a debt collection capacity and a debt purchasing capacity. We would likely look to mitigate any of the regulatory or profits risk by approaching that more from an acquisition strategy than a Greenfield strategy. I wouldn't rule out a Greenfield possibility. But we recognize that there are differences. What we believe we bring in those situations is the two key attributes which we spoke about today which is we've got this fantastic operating center, which as long as we're moving across the English-speaking part of the world, could drive operating efficiencies. And then analytic capabilities, which we believe would help enhance returns in those businesses. So it would be debt buying, would be English-speaking countries. But largely would be an acquisition strategy, not a Greenfield strategy.

Okay. And are there material differences there from a regulatory standpoint between those businesses?

There are.

Okay. All right and I guess the other question is with regards to-- can you talk about I guess what are the value-add really in using a third-party lawyer, which you use in your legal system there as opposed to kind of bringing in house for the states that you do have a material presence for utilizing the channel? And I guess it would seem that that would be a very nice way to kind of continue to reduce costs from the system. I guess what's the advantage to using the third party that you do and the third parties that you do? And then also any thoughts and conversation about potentially looking and bringing that in house?

The biggest advantage you have is you have experts who understand the inner workings of each individual jurisdiction. I may have my math wrong but I believe there is something like 3,300 jurisdictions across the country. And your ability to be effective in those-- not building capacity yourself we believe in right now is in time and cost. That being said, we continue to look at and think about doing work ourselves internally, partially because of the cost savings. Actually partially due to the control factor, we're able to make sure that we control all of the activities done on our behalf, especially in a heightened regulatory environment. So it's a strategy we've spent a lot of time talking about over the last few years. We're starting to put resources again doing the math to figure it out and it's something we'll consider both in the near term and beyond.

Okay. Thank you.

Thank you.

I'm showing no further questions. I would like to turn the conference back over for any closing remarks.

Well thank you for listening. We believe our company is well positioned to take advantage of the purchasing opportunities available in the marketplace and provide industry leadership and partnership with policymakers, consumer advocates, and consumers. Against the backdrop of our competitive strengths, we continue to demonstrate our commitment to building shareholder value while creating solutions for our consumers. We look forward to speaking with you on our next call. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.