Encore Capital Group Inc (ECPG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Encore Capital Group's fourth-quarter 2010 results conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

And now I'll turn the floor over to Ray Sulentic. Sir, the floor is yours.

Thanks, Huey. Good afternoon. Thank you for joining Encore Capital Group's fourth-quarter and full-year 2010 earnings call. The call will be led by 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.

Before we begin, let me take a moment to reference the Safe Harbor provisions. Some of our commentary and answers to questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made, and which reflect management's current estimates, projections, expectations or beliefs, and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks, uncertainties and other factors that may affect future results of the Company are discussed in the Reports we filed 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 the financial measure contained in the covenants used in our credit agreement, in the 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 to the liquidation of our receivables 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 costs, to cash collections to the debt purchasing business in the periods presented. The presentation of additional information should not be considered an alternative to or more meaningful than our results prepared in accordance with GAAP.

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

As 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, Ray, and good afternoon. I appreciate everyone joining us for our discussion of Encore's results for the fourth-quarter and full-year 2010. We recognize that some of you may have evening plans, and as such, we intend to go through our prepared remarks quickly.

I am very pleased to report that an already strong 2010 ended on an exceptionally high note. As in previous quarters, Encore's fourth quarter performance was highlighted by record-setting cash collections and net income, in spite of what is typically the slowest seasonal period for collections. In addition, we once again demonstrated our ability to profitably deploy capital, while focusing on rational pricing and generating robust internal rates of return.

In many respects, our success reflects Encore's key differentiators at work -- namely, our widespread use of analytics; our broad investment in data and behavioral science; the significant cost advantages that result from our operations in India; and our enterprise-wide account level cost database, as well as our commitment to conduct business ethically and in ways that support our consumers' financial recovery.

One of our most noteworthy accomplishments during the fourth quarter was in the area of purchasing. We successfully deployed $119 million, which makes the fourth quarter our largest purchasing quarter since 2005. Total purchases for the year were $362 million. This is a $100 million, or 40% increase, compared to 2009. As part of our purchasing strategy, we have always sought to identify negotiated and large transactions, and we closed one of these during the fourth quarter. We completed a $46 million portfolio purchase, which was the second largest individual purchase in our Company's history. Although it is early, this portfolio is currently performing above our expectations.

We continue to invest in bankruptcy receivables during the fourth quarter, spending $4 million. We entered the bankruptcy purchasing space in the third quarter and are excited about the possibilities offered by this market, but believe it is important to put it in context. We continue to expect our bankruptcy receivable purchase volumes in 2011 to be less than 10% of our total spend.

Shifting now to collections, in the fourth quarter, we collected $149 million, representing a 20% increase from the fourth quarter of 2009. This allowed us to surpass the $600 million mark for the full year, which is a record for Encore. We are extremely proud of our team and their ability to increase collections despite the challenging macroeconomic environment.

Our consumers' payment behaviors continue to be consistent with those in prior periods and are well within the expectations of our models. In 2010, we saw payor rates increase by about 10% when compared to 2009, while payment sizes declined 3%. The reduction in average payment size is largely reflective of a pool of incremental payors generated by our India collection teams in portions of our portfolio that were historically unprofitable. Our operations center in India provides Encore with significant cost advantages that enable us to focus on lower balance accounts as well as accounts that require deeper discounts. These collections are incremental and contribute meaningfully to overall portfolio net present value.

Our focus on cost efficiency continued to yield tangible results throughout 2010. During the fourth quarter, our overall cost to collect ratio was 44.4%, a significant improvement from the 48.5% recorded in the same period of 2009. For the full year, our cost to collect was 43.7%, almost 400 basis points lower than the prior year.

The engine behind the cost improvements is our operating center in India. In recognition and celebration of our colleagues in India, we hosted a number of analysts and bank facility members at our center last month. During that visit, we showcased our leadership team as well as the call center staff, IT employees, and other functional groups in India, that distinguish Encore today. At the end of 2010, the total number of employees in India was just over 1,200, up 36% from 2009. We plan to continue investing in 2011 and expect total employees in India to be approximately 1,500 by the end of the year.

We encourage you to visit our website, where we've posted the presentations that describes our Company's journey to success in India.

In 2010, Encore generated strong cash flows, showcasing the growth in our overall business and the lower overall costs of our core collection activities. This is reflected in the fourth quarter's operating cash flow or adjusted EBITDA of $84 million, a 27% increase from the fourth quarter of 2009. For the full year, we generated $347 million of adjusted EBITDA, a 31% increase from the prior year and a record for the Company.

I would now like to discuss the current pricing environment. Portfolio prices appear to be increasing moderately and this is particularly evident for newly charged-off or fresh portfolios. We believe this may be a function of certain competitors gaining access to additional capital and becoming more active. Although we expect pricing to remain higher this year than they were during 2009 and 2010, we fully anticipate that we will be able to buy portfolios at attractive returns throughout 2011.

This is largely due to the strength of our operating platform, which is based on individual consumer characteristics, rather than asset type or age of receivables. During the past decade, we've successfully shifted our purchasing strategy along the delinquency spectrum to maximize internal rates of return. As a result, we are able to find the imbalance between portfolio returns and market clearing prices.

For example, in fresh portfolios are relatively expensive, we are able to shift our strategy to purchase portfolios that charged off in prior periods. Furthermore, our entrance into the bankruptcy market should contribute to increasing purchasing levels in 2011.

The final fourth-quarter business item I'd like to discuss is the recent growth at Ascension Capital, our subsidiary and a provider of bankruptcy services to the financing industry. While it was not visible in the fourth quarter's results, due to the deferral of revenue recognition for this business, Ascension delivered three months of strong performance, reflected in new client onboarding.

At the beginning of the fourth quarter, Ascension was responsible for managing 66,000 accounts for major financial institutions. With the addition of a significant new client, managed volumes increased by nearly 70% to 111,000 accounts. This success continued into early 2011, as Ascension brought on two additional large clients.

Much of the growth at Ascension is the result of our continued investment in system functionality that distinguishes our service offering from the competition. Later this year, the bankruptcy process will have an important rule change that will meaningfully increase the processing cost for those companies that have not yet made the investment in people and systems. Specifically, on December 1, Proof of Claim forms will require human review and signature prior to filing.

Today, for most companies, bankruptcy claims are filed through an automated process. This new law will require a meaningful change in process and create a corresponding increase in servicing costs. Late last year, we proactively adopted procedures that address these requirements, and believe our platform will become increasingly attractive to financial services firms that are struggling with constrained human resource and information technology budgets. 2011 promises to be a watershed year for Ascension.

Before handing the call over to Paul, who will review our results in more detail, I'd like to spend a few moments discussing a recent legal settlement and the overall regulatory environment.

In 2008, a lawsuit was brought before the US District Court in Ohio alleging that our affidavit process was insufficient. Although the Court's 2009 ruling challenged neither the validity of the debt nor the consumer's underlying obligation, it did identify what the Court considered to be areas for improvement in our process as it existed at that time. In 2009, we enhanced our affidavit process, consistent with the Court's guidance. Despite the fact that we made changes to our process, the legal case lingered into 2011, as we continued to challenge certain accusations.

In addition, as mortgage companies received increasing public attention regarding so-called robo-signer issues, copycat lawsuits were filed against our Company and several additional states, which contained similar allegations. Some of these cases were reported as though there were issues with our current affidavit process, which is not the case. Nevertheless, after carefully considering the amount of time and resources we were dedicating to these lawsuits, we decided it was in the best interest of our Company and its shareholders to reach a conclusion on the affidavit-related claims on a nationwide basis. We recently agreed to the principal terms of a settlement.

Depending on the number of respondents nationwide, the settlement will total between $5.2 million and $5.7 million, a substantial portion of which will be covered by insurance. The net financial impact of the fourth quarter results was approximately $0.04 per share. A hearing in which the fairness of the final settlement will be determined, will be scheduled shortly. Following the hearing, we look forward to putting this issue behind us.

Encore takes seriously its responsibilities in the areas of consumer rights and fair bargaining. During public presentations and in our public filings, we candidly outline our aspirations in this area, and describe the actions we are taking to ensure we play a constructive and positive role in the country's financial dialogue.

Fundamentally, we are in the business of working with consumers to help them get on the road to financial recovery. Once we identify those consumers who we believe have the ability to repay their outstanding financial obligations, our goal is to work with them to develop a repayment plan that is within their financial means, and enable them to regain access to the credit markets. Not only is this good for our consumers and shareholders, it has broader positive implications for both our credit market and the overall economy.

With that, I would like to turn the call over to Paul, who will review our results in more detail. Paul?

Thanks, Brandon. In Brandon and my prepared remarks, there are many detailed numbers. In case you would like to refer back to them at any time, we will post a transcript of these prepared remarks on our website immediately following this call. But before discussing our results for the quarter, I would like to highlight some positive changes we recently made to our capital structure.

First, we exercised half of our accordion, increasing our credit facility by an additional $50 million and bringing our total available revolving credit capacity to $410.5 million. We are delighted that many of the existing banks in our facility chose to increase their commitments and we are happy to welcome Union Bank as our newest partner. We believe this result conveys confidence in Encore's future business prospects.

In addition, we raised $25 million through a second tranche of seven-year senior secured notes to Prudential Capital Group, bringing the total raise to $75 million. The terms and conditions of this transaction are the same as the $50 million private placement that closed in September 2010, although the new notes bear interest at seven and three-eighths percent, which is slightly lower than the first tranche.

This new financing increases the average maturity of our debt at favorable rates, reduces our reliance on a single source of debt financing, and strengthens our overall balance sheet. It also more closely matches the duration of our cash-generating assets with our long-term cash obligations.

As you know, our collection curves are based on an 84-month period, so the seven-year life of the Prudential notes more closely matches the economic life of our portfolio investments. In addition, this incremental capital provides us with the flexibility to grow our business at a cost of debt that is significantly lower than our return on assets or equity. One of our goals is to improve our return on equity, and we believe that the prudent use of leverage should result in increased ROEs.

As we mentioned back in September, we also believe that the terms of our private placement transaction are attractive when compared to other debt and equity-linked products. We feel very fortunate to have secured Prudential as a partner.

As Brandon discussed, we had a very strong quarter and year. Collections outperformed our internal forecast by 10% for the fourth quarter and 17% for the year, and we significantly increase the embedded value of the Company with little incremental leverage.

One of the most relevant metrics we focus on is adjusted EBITDA, which reflects our ability to generate cash flows. It represents the cash flow we generate that is available for future purchases, capital expenditures, debt service, and taxes. For the fourth quarter, adjusted EBITDA was $84 million, an increase of 27% compared to the $66 million reported in the fourth quarter of 2009. For the full year, adjusted EBITDA increased by 31% to $347 million. This improvement allowed us to deploy $362 million for portfolio acquisitions during the year, while only increasing debt by $82 million.

As a result, our leverage ratio continues to decline to 1.11 times trailing 12 months adjusted EBITDA at the end of 2010 from 1.15 times at the end of 2009. As Brandon mentioned, we pay close attention to our cost to collect ratio, which was 44.4% in the fourth quarter of 2010, compared to 48.5% in the fourth quarter of 2009. This 410 basis point decrease is a key driver in our ability to be competitive in a rising portfolio-pricing environment, and we believe it will enable us to increase our purchasing levels in the future.

Looking forward, we expect the cost to collect ratio to continue to improve incrementally over time, but it may fluctuate from quarter to quarter, depending on the contribution by collection channel and overall collection volume. To get a better understanding of historical fluctuations in our cost to collect ratio, please refer to the table on page 30 of our 10-K that was filed today.

The third metric that we track is estimated remaining collections, or ERC, which reflects the remaining value of our existing portfolio. In addition to record collection performance, we significantly increased our ERC by $229 million over the prior-year to $1.4 billion. The continued improvement in these metrics demonstrate the advantages provided by our operating model, and validate our conservative approach to financial leverage, even as we increase debt capacity for future business growth.

Moving on to other financial results for the quarter, annual collections were the strongest in Encore's history at $605 million, up 24% from $488 million last year. Our call centers contributed 46% of total collections, totaling $69 million for the quarter as compared to $46 million in the fourth quarter of 2009. For the full year, call centers contributed $268 million or 44% of total collections as compared to $186 million in the prior year, a 44% increase.

Collections from our center in India were $104 million in 2010 or 39% of total call center collections, which was an increase of 96% from the $53 million in 2009. We expect continued growth in call center collections through 2011 as a result of our significant growth in call center personnel, particularly in India. We now have over 900 account managers at our New Delhi site. Many of these account managers have been with us for fewer than six months. As they progress through their training and development programs, we expect to see continued, meaningful improvements in overall call center productivity and cost to collect.

In total, we employ over 1,200 professionals in India. Since the growth in our employee base has important implications for our overall costs, we have included a table on page 43 of our Form 10-K, which shows employee numbers by segment.

Legal channel collections grew to $70 million this quarter as compared to $59 million in the fourth quarter of 2009. This represented 47% of total collections. For the full year, legal collections rose by 15% to $267 million. Quarterly cost to collect in the legal channel was 42.4%, down meaningfully compared to 47.1% in the fourth quarter of 2009.

There were two reasons for this decline. First, as we continue to refine our analytic capabilities and increase our ability to predict consumer behavior, we have become more precise about where to use this channel. As a result, our liquidation has improved, which has resulted in a decline in our cost to collect.

Second, the refinements we have made over the last few years are resulting in improved recoveries of court costs. As a reminder, we pay upfront court costs every time we initiate litigation. We defer that portion of our court cost expenditure that we expect to recover. We are now experiencing recoveries in excess of what we have been deferring. As a result, during the fourth quarter, we changed our court cost reserve methodology to reflect our improved recovery rate. This resulted in a benefit of approximately $2.8 million, which was reflected as a change in estimate in our financial statements. Without this change in estimate, our cost to collect in the legal channel for the fourth quarter would have been slightly higher, at 46%.

Finally, as it relates to the legal channel, our long-stated preference is to work amicably with our consumers in negotiating a mutually acceptable payment plan that works within their personal financial situation, which almost always involves a substantial discount from what is owed to us. We not only believe that this is the right thing to do for our consumers, we also believe it is the right thing to do for our business, as the legal channel is our most expensive.

Unfortunately, many of our consumers choose not to engage with us to reach such a settlement. In fact, in 2010, only 21% of our consumers responded to our calls and only 3% responded to our letters. Accordingly, and as a last resort, we are left only with the option of using a legal channel.

The remaining 7% of collections came primarily from third-party collection agencies. Fourth-quarter agency collections decreased to $10 million from $20 million in the prior year, reflecting changes in our operating strategy, under which we continue to shift more of our work to our call centers, especially as capacity comes online in India. I would also like to point out that we had no portfolio sales in the fourth quarter or in any quarter of 2010. These sales are no longer part of our strategy.

Moving on, our revenue from receivable portfolios was $96 million, an increase of 24% over the $77 million in the fourth quarter of 2009. For the full year, revenues increased by 22% to $364 million. As a percentage of collections, and excluding the effects of allowances, the revenue recognition rate increased to 67.8% from 65.9% in the fourth quarter of 2009. For the full year, revenue recognition declined from 65.5% in 2009 to 63.9% in 2010. The reduction in the revenue recognition rate is attributable to our conservative approach to setting initial IRRs and our policy of increasing them gradually after periods of overperformance.

As most of you 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 non-cash allowance charges in certain periods. During the quarter, we had $1.2 million of allowance charges in the 2005 vintage; $1.8 million in the 2006 vintage; $1.4 million in the 2007 vintage; and $1.8 million in the 2008 vintage. To date, we have not had any allowance charges in either the 2009 or 2010 vintages.

In aggregate, these total $5.4 million in net allowance charges for the quarter compared to $5 million in the fourth quarter of 2009. While similar in net dollars, the total allowance as a percentage of investment in receivable portfolios declined to 0.8% in 2010 from nearly 1% last year. At Ascension, our fee-based bankruptcy servicing business, revenue for the year rose by 2% from the prior year to $17 million.

Turning to expenses, our total operating expenses were $72 million, up from $65 million in the fourth quarter of 2009. For the full year, total operating expenses increased by 15% to $284 million. Included in operating expenses for the year were stock-based compensation expenses of approximately $6 million and Ascension operating expenses of $14 million.

The income tax provision for the year was $29 million, reflecting an overall tax rate of approximately 37%. Looking forward, we want to remind investors that the tax holiday in India is due to expire on March 31, although there is a slight chance that it will be extended during the budget announcements later this month. The impact of the expiration, combined with the elimination of several small tax benefits that occurred in 2010, will likely lead to a higher tax rate for 2011. We anticipate that our overall tax rate will be approximately 40%.

Finally, our fully diluted earnings per share during the fourth quarter were $0.56, an increase of 65% compared to quarterly earnings per share of $0.34 in the same period last year. For the full year, the Company recorded record earnings per share of $1.95, up $0.42 from the prior year. Included in the fourth quarter's earnings were two individually significant items. The first, as I mentioned previously, was the change in our court cost reserve methodology. This resulted in a benefit of approximately $2.8 million on a pretax basis or $0.07 per share after tax. The second item relates to the litigation settlement that Brandon discussed in his remarks. This had a negative impact of approximately $0.04 per share after tax.

Looking forward, I would like you to please keep in mind that the first quarter tends to be seasonally strong from a collection standpoint. The impact of higher collections will result in increased costs without a proportional rise in revenue. When using accretion accounting, revenue does not fluctuate proportionally with increases or decreases in collections; and since we are conservative in our application of accretion accounting, both when setting our initial collection curves and when increasing IRRs, most of the additional revenue from stronger-than-expected collections occurs well beyond the period when we receive those collections.

Given the typical seasonality of our business, with collections highest in the first quarter, declining throughout the year, and relatively stable revenues, we would expect earnings would be lowest in the first quarter and highest in the fourth quarter, as a result of the additional costs associated with increased collections. As a result of these factors, and after taking into account the one-time items we have discussed, we do not expect a sequential increase in earnings during the first quarter of 2011 as compared to the fourth quarter of 2010.

I want to emphasize that we do not manage the business to quarterly earnings, but with a longer-term focus. Our goal for 2011 is to grow cash flows in earnings over 2010.

Finally, as it relates to 2011 purchasing activity, it is important to note that our fourth quarter 2010 purchases were exceptionally strong, particularly in light of the $46 million single purchase in December. While we expect to continue purchasing at a strong pace, we do not expect the fourth quarter level to be the average quarterly trend. We expect to be in a position to provide full-year purchasing guidance at our June shareholder meeting.

With that, I will turn it over briefly to Brandon before opening the call up for questions. Brandon?

We were very pleased to conclude an already strong 2010 on an exceptionally high note. Encore's fourth quarter performance was highlighted by record-setting cash collections and net income, as well as the deployment of capital in what was our best purchasing quarter since 2005.

Encore's key differentiators were at work in the fourth quarter and full year, and we believe they will be the key drivers in 2011, as we anticipate growing cash flows and earnings year-over-year.

Before opening up the line to your questions, please note again that we will post a copy of our prepared remarks on our website soon after the conclusion of this call. Please go to the Investor Relations section of the website to download a PDF of the remarks.

With that, we will be happy to answer any of your questions. Operator?

(Operator Instructions). David Scharf, JMP Securities.

Thank you for taking my questions. Brandon, just wanted to start maybe kind of very high level, in terms of your read on consumer health and payment patterns. I think last quarter, you commented that payor rates were up 12% versus '09, and I think that was in reference to Q3. You mentioned a full-year figure now is up 10%.

Can you just give us a sense, over these last three, four months, how we ought to think about payment patterns? Obviously, employment has been stubbornly constant at double digits -- close to double digits; but are you seeing anything that tells you liquidation environment is improving?

David, thanks for the question. I think we believe that liquidation is likely to be on par as it had been throughout the entire year. We're not seeing a meaningful change in either direction.

We think that, as we've stated in the past, that our consumers weren't as impacted in the macroeconomic downturn. So while we had some slight declines, it wasn't nearly to the extent that some people may have anticipated. So we believe we will still see a strong consumer, but we don't, on a relative basis, so we're not expecting a meaningful uptick in payment rates as we look out.

Got you. Shifting to the pricing environment, our checks with a number of industry participants, they've also highlighted fresh paper in particular as increasing the most. I'm just curious what the makeup of your Q4 purchasing was, particularly that large transaction in terms of fresh versus recall paper?

I don't have the exact numbers in front of us. What I would say is that the vast majority of our fourth quarter purchasing would have been in the primary/secondary stage, not right at the fresh stage. And so we have been buying, we have been shifting throughout the year to more aged portfolio purchases. That trend started in the middle the year, and as we got to the beginning of 2011, the mix is really in that range, the sort of six to 18 months from charge-off rather than right at the fresh stage.

Okay, good. And to the best of my knowledge, the 10-K hasn't been filed or at least it's not showing up online with the SEC. Can you review for us some of the metrics, such as monthly IRRs and maybe the breakdown once again of the costs to collect per channel that we would normally find in the 10-K?

Yes, sure. So, just so everyone knows, the 10-K was accepted by the SEC a little bit after 4 o'clock today; but as a result, I guess, of what we've been told, some glitches in their systems, both for Encore and other registrants, it hasn't been posted to Edgar, and therefore, hasn't reached our website yet. So we can certainly provide the data.

So the monthly IRR for the 2010 vintage, is that what you're looking for, David?

Yes, I mean, I won't ask you to go through every vintage year on this call but maybe the total average monthly for the fourth quarter.

The total average is 5.1%.

Okay. And can you quickly -- I had written down [$42.4 million] as the cost to collect for the legal channel, [$46 million] without the adjustment. Can you give us -- you may have mentioned it, what the same productivity number was for your own call centers?

Yes, so let me get that information for you. So the call center -- direct cost per dollar collected in the call center was 9.5% for the year.

For the year, okay. And for the quarter, is that available?

We don't publish (multiple speakers) it for the fourth quarter --

(multiple speakers) We can just back into it.

-- we just have for the year, that's right.

Okay, great. And lastly, I'll get back into queue after this, but maybe just to put you on the spot a little bit, Paul -- the last couple of quarters have obviously been exceptionally strong in terms of collections and productivity. Obviously, the pool accounting has resulted in an uptick once again in allowance charges.

Should we be reading that there's a little bit of wiggle room, conservativism, and the ability perhaps, given how strong the earnings have been these last six months? And maybe taking a little more charge upfront and positioning you a lot better going forward?

We are consistent on a quarterly -- each quarter on how we take the allowance charge. And it's based upon the performance during the quarter and our expected performance going forward. So I think that the allowance charges is reflective of what we collected in those pool groups where we have allowance charges and what we expect to collect. So, methodology is consistent with what we've done in the past.

Right. Fair enough. Thanks a lot.

Hugh Miller, Sidoti.

I was wondering if we could just talk a little bit about the large portfolio purchase? And was wondering, I guess -- have you had a history with this particular seller? What got you comfortable making the purchase? And was there any type of discount to the prices you were seeing for similar paper in smaller size, just given that the large size of the sale?

So, we do have experience with this particular seller, so that was helpful. But more importantly, the way we go about valuing portfolios makes it possible for us to buy both in the retail market and the direct from issuer market, and across asset classes. Because, if you recall, we're valuing the individual consumer and asking the question of, can they recover?

So we believe larger pools actually give us the greater sample size of consumers to work with, which gives us greater confidence in our model. So the fact that it was a large transaction is helpful for us, and because we had some history with the particular seller, it added to our comfort.

And I didn't catch it, was it a reseller? Or was it from a credit issuer?

I don't think we're going to disclose exactly where the portfolio originated from.

Okay. And any color on the dynamics of spot purchases in the quarter versus forward flow relative to prior quarters?

I don't have it -- also have it in front of me. If you take out that one spot transaction, the split is probably similar to what it was for most of 2010, although I don't have the breakdown sitting here.

Okay, okay.

And Hugh, I think it's, as we've said in the past, most of the forward flows that are out there right now are relatively short in duration, so they're typically three to six months. So there aren't a lot of 12-month flows as we've seen in prior years.

Okay. Is that something that you, on a relative basis, are trying to look to expand, given your outlook that we could do some firming of pricing? Or it's just that the sellers aren't willing to commit to longer-term at this point?

When we're comfortable with the pricing, we are certainly willing to lock up the portfolio for a longer period of time. I think it's more of a dynamic of what happened a few years ago, where many of the banks found themselves having sold to people who couldn't pay for the portfolio and not wanting to have been locked in for long periods of time. So I think the market is moving to shorter duration just because it allows them, the sellers, to keep a firm view of what's happening in the marketplace, and not get in a difficult position if they sell to the wrong person.

Okay. And your forecast for headcount increase in India up to 1,500 from 1,200, is it safe to assume that the majority or the biggest portion of that increase is going to be within the call centers in headcount there?

Yes.

Okay. I think that answers my questions. Thanks a lot.

Mark Hughes, SunTrust.

Paul, just to clarify your thoughts on Q1 EPS, I think you talked about maybe steady sequentially adjusted for the one-time items. So, assuming a net benefit of $0.03, are we talking sort of $0.53 number would be the base on which we would then think about Q1?

No, I mean, if that's -- we weren't guiding you to a $0.53 number for Q1. That is what Q4 was without the two one-time items we mentioned. Our results for Q1 will be dependent on how much we collect. As I mentioned, very strong collection performance will result in additional costs and lower earnings. It will be dependent upon the level of purchasing in Q1.

So there are a lot of factors that go into it. We just wanted to let you know that it's -- not to expect a sequential increase, but not necessarily that we're guiding you to a $0.53 number. It could fluctuate, depending upon the level of collections and purchases, and many other factors.

Right. Exactly. Okay, that's clear.

And then the Ascension revenue, as we think about the clients that you brought onboard, I know you've talked before about how you expect profitability to be up substantially in that business. How should we think about the revenue run rate for Q1 in going forward?

We haven't provided specific run rate -- guidance on revenue run rate for Ascension yet. What we have said, and it remains the case, that we expect EBITDA for the full year of 2011 to be $8 million.

Okay. And then --

And Mark, but we do expect -- I mean, given the way revenue recognition works with Ascension, where much of the revenue is deferred until the bankruptcy cases are finalized for Chapter 7 bankruptcies, and recognized over a longer period of time for Chapter 13 bankruptcies, revenue should ramp during the year. So it will be lowest in the first quarter and should ramp throughout the year.

Okay. And then how about the -- for the 2010 portfolio, the expected collections multiple. Can you share that?

I believe it's 2.2 times.

And that's for full year including these purchases?

That's correct.

Okay. Alright. Thank you very much.

Sameer Gokhale, KBW.

I know it's not a very reliable metric to look at, but just out of curiosity, if we calculate the pricing as a percentage of face value for that $46 million purchase, and then in total, do you have those numbers?

Paul is looking up the price point total. We won't disclose the individual price but, certainly, we give you the price for the quarter.

The total for the quarter is 3.07%.

Okay. Thank you. And then you did provide some commentary earlier about duration of these contracts. I think issuers or sellers wanting to maybe choose shorter duration forward flows, for example, than longer duration ones. But is there, based on the fact that pricing has increased, are you seeing an increased willingness on the part of issuers to actually sell more portfolios versus [leased in with] contingency collectors?

In other words, have we reached or are we close to the equilibrium point where all of a sudden we're going to see a large supply of portfolios come onto the market, because the issuers now feel that pricing has gotten to a level where they're comfortable selling?

I think we're certainly seeing an increase, as evidenced by the fact our pricing has shifted. We've been able to deploy as much capital, even though we've shifted portfolio purchasing into some of the older portfolios, suggests that at least the portfolio that was not sold over the last few years is coming to market. And we think on the fresh side, issues will continue to sell. So, net, we expect more volume in 2011 over 2010.

Okay, but at higher prices, that being the offset?

That's correct.

Okay. And then, in terms of your expectations, you talked about a mix on the BK versus the non-BK paper and said that it'd be less than 10% of total purchases. Is that because you're making an assessment of the relative attractiveness from a return standpoint of BK versus non-BK? Or is it just the fact that, historically, you mean you very recently started buying bankruptcy paper? And so the mix is weighted more towards the non-BK stuff. So, if you could shed some light on that, that'd be helpful.

So I think it's a function of two things. One is just being prudent about entering the space and getting comfortable with our processes, getting comfortable with the returns. The other is that the price of bankruptcy portfolios has risen fairly significantly since the middle of last year. And so we believe that there may not be as many places to deploy capital as profitably as in our core business. And so, just balancing pricing, balancing our process, we just don't want anyone to think we're going to be buying significant amounts in 2011.

Okay. That's helpful. No, it's pretty consistent with what we'd heard about in terms of pricing on the BK side. So that's helpful.

And then just my last question was, in terms of the legal settlement -- so, I'm not a lawyer, so it'd just be helpful to get your thoughts on what this really means. Does this mean that once you settle with all the -- or you've reached an agreement with the parties involved to settle, now you're just waiting for the final approval from the courts. And then going forward, this is a done deal. There can be no more lawsuits related to this issue. Is that how that works?

So how it does work is that there will be a hearing at which both sides will go in to present why this is a fair settlement. At that point, we believe that will be certified by the judge. And then we'll be able to move forward from the affidavit-related claims that have been made.

Unfortunately, we live in a country where people can sue you for anything. So I can't say that we won't get sued for something, but we believe in large part we'll put this matter behind us.

Okay. That's great. Thank you.

Mike Grondahl, Northland Capital Markets.

Yes, thanks for taking my questions, guys. The first question is just, has your collection strategy changed at all in the last couple of quarters, just as we've kind of gone from the Great Recession to a little bit more of a recovering economy?

I don't think in any meaningful way. So I think we've maintained our strategy throughout, which has led to results. We don't see enough movement in the greater macroeconomy impacting our consumers to change the strategy. So it remains largely the same.

Okay, great. And then (multiple speakers) --

(multiple speakers) From an internal perspective, though, Mike, we are able to, with the expansion of the workforce in India, we're able to use our account managers there to collect on portfolio that we wouldn't have historically, because of the cost to collect on that portfolio. So, externally, there may not have been changes, but because of some internal changes being the expansion of India, we're able to work -- we're able to pursue and collect on accounts differently than we have in the past.

Okay. And then two other questions. You had mentioned in relation to this $46 million portfolio investment that you were at an early stage, but it was ahead of expectations. Can you kind of just help us understand that a little bit better?

And then maybe, secondly, could you kind of qualitatively talk about your pre-2008 pools and your post-2008 pools, and how they're performing compared to your expectations?

So, in terms of one large portfolio, certainly everything we want to look at coming out of that gate is our ability to contact consumers and convert them into payers. And we're finding that conversion to be happening at a faster rate than we anticipated; even though we expected it to be a very strong portfolio, it's actually doing better and we're continuing to monitor that. But feel very comfortable that all of what we thought was going to happen will happen, if not a little bit more.

In terms of giving you guidance on pre-2008, 2009 and beyond, I think pre-2008 portfolio has continued to perform largely as we expected. As Paul mentioned, you do have pockets where the performance is off, especially as you get later in the curve and the variability is a little bit greater; but I think those will ultimately prove to be good transactions for the Company. At a time when the industry wasn't able to generate a return in that window, I think you're going to see we have, and we'll hit the expectations all up.

And then in the post-2008, I think you'll see very strong performance and purchasing in those windows that allows us to really generate strong returns.

Okay. Thank you.

Justin Hughes, Philadelphia Financial.

First question is, can you give us a breakout on the operating expenses between core Encore and Ascension?

Sure. So, operating -- let me just pull that information -- operating expenses for Ascension were $14 million and operating expenses for the entire Company were $72 million. So, $72 million less $14 million is what the operating expenses were for the core business.

$72 million.

So $72 million was the total --

For the quarter.

I'm sorry, fourth quarter -- yes, fourth quarter.

But Ascension, the $14 million is for the full year, right?

Full year, that's right, that's right. $14 million for the full year, $284 million for the full year for Encore.

Okay. And then my second question is -- how do you think about your leverage ratios? I mean, one of the most impressive things about the growth that you've done in the last year is that, if I look at your debt to equity or debt to tangible equity, your ratios are basically flat to slightly down from a year ago.

What do you think -- how do you look at your leverage? Which are -- what are the key ratios and what do you think the optimal numbers are?

I mean, we look at the ratio that you mentioned. We also look at our -- what we expect to collect from the rest of the portfolio, so our estimated remaining collections and how that compares to our debt levels. And we look at the adjusted EBITDA or the cash that the business is generating.

So we feel very comfortable with our debt levels right now and our leverage right now. In fact, we think that we could increase them to the extent there were a portfolio to acquire the returns that we're getting and the cash flow that we're getting -- that we're generating on our purchases are very strong. And the use of leverage to purchase those portfolios, we believe, it would be a prudent thing to do. As I mentioned, it will -- the use of leverage in this manner will continue to drive ROEs, which is something we focus on.

Okay. Thank you.

Edward Hemmelgarn, Shaker Investments.

Brandon and Paul -- there's just one question is, there's been a number of articles and news flows about collection companies being required to let their debtors know -- you know, you have to let them know, if it's beyond a certain date, that they're not required to make any payments. Is any of this a change or will bring about a change to how you've operated? Or you always followed that strategy? And if so, I mean, are you filing for legal collections earlier? I mean, is any of this going to impact on core at all?

We've certainly seen a trend over the last few years of different states focused on the legal statutes -- some cases shrinking it and some cases notifying the consumers that beyond that point, that they have no -- that we have no legal recourse to pursue if they choose not to pay. We've always made those disclosures. And in our purchasing, we've anticipated where there is a shortening of statutes.

So I don't expect it's going to influence the business. It will certainly influence what we're willing to pay for certain portfolios as windows are closed, but sitting here with the book today should not be impacted by the legislation or any of the disclosure rules that have gone out there.

Do you expect then that is a -- that there will be a decrease and then in the amount of what companies such as yourself are going to be willing to pay for older portfolios?

I think that's the logical conclusion that, over time, if you're unable to, for example, use litigation as a collection avenue, and a consumer just unwilling to engage with you or talk to you, if you've lost the ability to do that, you certainly can't pay as much. So I do believe if enough changes, the pricing will come down.

To date, there hasn't been enough change to really meaningfully drive the price down. But we're always constraining our valuation by what we're able to do. So over time, what we've been willing to pay has come down and we'll continue to monitor accordingly.

Okay. Thanks.

Sameer Gokhale.

Paul, can you just remind us on that private placement transaction what the advanced rate was?

It's not a revolving facility, so it's just a -- it's just $25 million term loan with a seven-year term, five-year average life at seven and three-eighths.

Okay. But it's a secured facility, right? So is it collateralized by a specific dollar amount of assets?

It's pari passu with a credit facility.

Okay. And then I wanted to just get your thoughts on this asset class potentially being something like it could be securitized. I think if I recall correctly, in the late 1990's, there was a company called CFS and Credit Trust -- I believe they had securitizations out on charged-off portfolios. And I don't know if you've been in touch with rating agencies or investors, and if that's a -- in your opinion, a viable funding source going forward. Is that something you've explored again or revisited at this point?

We've definitely had those discussions and it is an asset that can be securitized. Right now, when we refinanced our facility, we looked at all the alternatives. And the credit facility, which we put in place last February, was the -- in terms of the size of the facility, in terms of the cost of the facility and the flexibility of the facility, that was the best alternative we had at that time.

But we continue to look at lots of other options, including securitization. So there have been a couple of transactions that took place before the 2008 credit meltdown on the securitization side, but I'm not aware of any since then. But it is an option that we continue to look at.

Okay. Thank you.

(Operator Instructions). At this time, there appears to be no additional questioners in the queue. I'd like to turn the program over back to Brandon Black for any closing remarks.

I'd like to thank everybody for their time today and we look forward to talking to you on our next earnings call. Take care.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.