Encore Capital Group Inc (ECPG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Encore Capital Group First Quarter 2011 conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

And now I'd like to turn it over to Ren Zamora, Director of Finance. Please begin, sir.

Thank you, Tyrone. Good afternoon and thank you for joining Encore Capital Group's First Quarter 2011 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 that 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 the future results of the Company are 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 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 through the liquidation of our receivable portfolios.

We included information concerning adjusted operating expenses excluding stock-based compensation expense and bankruptcy servicing expenses in order to facilitate a comparison of the approximate cash costs to cash collections for the debt purchasing business in the periods presented. The presentation of this 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 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 adjusted operating expenses, excluding stock-based compensation expense and bankruptcy servicing expenses, to the GAAP measure total operating expenses, and a reconciliation of tangible book value per share to the GAAP measure total stockholders' equity.

As a reminder, this conference call will also be available for replay on our website and we also plan to post the prepared remarks following the conclusion of the call.

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 for Encore's first quarter conference call.

We were very pleased with our performance during the quarter as our disciplined approach to portfolio underwriting and management led to record results for collections and cash flow. We increased our investment and receivable portfolios while reducing the Company's overall leverage and we strengthened the balance sheet by obtaining $15 million in new commitments from lenders in our revolving credit facility and adding $25 million in senior secured notes.

In addition, we increased the depth of our management team. Specifically, in January we hired Steve Gonabe to be our Senior Vice President of Human Resources. Steve comes to Encore with deep functional and industry expertise gained during his tenure at Household and HSBC, most recently as the SVP of Human Resources for all of HSBC North America. We are excited to have Steve on board and we believe he will be an instrumental part of our future growth plans.

The first quarter's strong cash flow is a function of our ability to focus our operating attention on those consumers with the greatest likelihood of recovery, as well as our continued emphasis on operating efficiency. For the quarter, our overall cost to collect declined 290 basis points to 40% from 42.9% in the first quarter of 2010.

The engine driving this improvement is the increased operating efficiencies created by our significant investments in technical and analytical resources, the performance of our long-tenured domestic site collections staff and the expansion of our operations center in India. We have fundamentally changed Encore's cost structure over the past few years, giving us a decided advantage over the competition when bidding on new portfolios.

Shifting to cash collections, in the first quarter we collected $191 million, which is a 35% increase from the first quarter of 2010. We saw strength across all of our operating channels.

The largest increase came from our collections sites where dollars collected per paid hour increased to $169, up from $150 in the same period last year. This metric excludes all dollars collected from our third-party law firms, agencies and bankruptcy portfolios.

Our consumers' payment behavior in the first quarter was slightly better than in prior periods. We saw payer rates across our entire portfolio increase by more than 10% when compared to 2010, while payment sizes remained consistent.

During the quarter, we generated just over 1.9 million payment transactions from 960,000 consumers, compared to 1.4 million transactions from 745,000 consumers in 2010.

We attribute the rise in the volume of payments in part to increases in operational capabilities, such as the increasing tenure of our collectors in India, and in part to the continual improvements in our analytical ability.

Our operations center in India also allows us to focus on lower-balance accounts, as well as accounts that require deeper discounts. These collections are incremental and contribute meaningfully to the overall net present value.

At the end of the first quarter, the total number of employees in India was just over 1,300, up 30% from the same period in 2010.

As we have seen in recent periods, operating cash flow or adjusted EBITDA grew at a faster rate than cash collections. This is reflected in the quarter's adjusted EBITDA of $116 million, a 41% increase from the first quarter of 2010 and a quarterly record for the Company.

As a result of this strong cash flow, we were able to use cash from operations to pay for all portfolio purchases in the quarter and reduce our overall net debt levels. Specifically, we deployed $91 million to purchase $2.9 billion of portfolio, which is up 11% from the prior year.

During the quarter, we completed 55 individual purchase transactions from 13 unique sellers. Most of our purchases were concentrated in the credit card asset class. In addition, we made investments in telecommunications, installment loan and bankruptcy portfolios.

Our strong purchases in the quarter, combined with the $119 million we spent in the fourth quarter of 2010, were the highest six month total in the Company's history.

Portfolio prices appear to be increasing moderately and this continues to be evident for newly charged-off or fresh portfolios. Although we expect pricing to remain higher this year than in 2010, we anticipate that we will be able to buy portfolios at attractive rates throughout 2011. This outlook is based largely on the strength of our operating platform, which is grounded on individual consumer characteristics rather than asset type or age of receivables.

During the past decade, we have successfully shifted our purchasing strategy as needed along the delinquency spectrum to maximize internal rates of return. As a result, we have been able to find the imbalances between portfolio returns and market clearing prices. For example, when fresh portfolios are relatively expensive, we shift our strategy to purchase portfolios that charged off in earlier periods.

With respect to how we interact with our consumers, we have received positive feedback regarding our industry-leading Consumer Bill of Rights, which we formally published on March 21st. The document codifies Encore's commitment to conduct business ethically, engage in a respectful and constructive dialogue with consumers and our ambition to play a positive role in consumers' financial recovery.

Recently, we received a statement from the Better Business Bureau applauding the Consumer Bill of Rights, recognizing our intent to drive meaningful change in the debt collection industry and noting its consistency with the Bureau's goals of creating an ethical marketplace and encouraging best practices. We will continue to work with the Bureau and other consumer groups to identify additional practices that will help create a new paradigm for the collection industry.

We believe it is critical to consider fair dealing from the perspectives of both consumers and those who regulate our industry. There continues to be significant regulatory activity and, as such, we are proactively engaging regulators and other key stakeholders.

During the first quarter, we reached out to the leadership of the Consumer Financial Protection Bureau and had a meeting that we believe was very productive. We were encouraged by the conversation and look forward to being a partner with them as their agenda for the collection industry evolves.

As we've said previously, we believe responsible legislation is needed to modernize the Fair Debt Collection Practices Act, which was created in 1977.

We strive to be an industry leader that follows a principled approach to credit recovery and take very seriously our dual obligation to both our shareholders and our consumers.

Finally, I would like to let you know that we are planning to host our annual Investor Day on June 9th in New York. I look forward to seeing you there, as this will be an opportunity to walk through our business in further detail. We will provide more specifics in the coming weeks.

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

Thanks, Brandon. As Brandon discussed, we had a very strong first quarter. Collections outperformed our accounting curves by 27% and our continued improvements in productivity meaningfully reduced our cost to collect. As a result, we generated $0.54 per share of earnings during the quarter and deployed more than $90 million on purchases, even as we decreased overall leverage.

One of the most important metrics we use is adjusted EBITDA. It represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes. In the first quarter, adjusted EBITDA was $116 million, an increase of 41% compared to the $83 million reported in the first quarter of 2010. This improvement allowed us to fund all portfolio acquisitions during the quarter, while decreasing net debt by more than $14 million.

Correspondingly, our leverage ratio declined from 1.1 times trailing 12 months adjusted EBITDA at the end of 2010 to just over 1 times at the end of the first quarter of 2011.

Another key element in our overall performance is our cost-to-collect ratio, which Brandon discussed in detail. I would like to add that we expect the cost-to-collect ratio to continue to improve incrementally over time, which we believe will enable us to increase our purchasing levels in the future while maintaining our financial discipline. While we expect to see improvements in cost to collect over time, it may fluctuate from quarter to quarter, depending on the contribution by collection channel and overall collection volume.

A 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 $162 million over the prior year to $1.4 billion. We believe that our ERC is conservatively stated because of our conservative approach to setting initial curves and only increasing future expectations after a sustained period of overperformance.

The continued improvement in these metrics demonstrates the advantages provided by our operating model and validates our conservative approach to financial leverage, even as we increase debt capacity for future business growth.

Moving on to other financial results, this quarter's collections were the strongest in Encore's history at $191 million, up 35% from $141 million during the same quarter last year. Our call centers contributed 46% of total collections, totaling $89 million for the quarter, as compared to $66 million in the first quarter of 2010.

Direct cost per dollar collected in our call centers declined to 8% for the first quarter of 2011 from 9.2% in the first quarter of 2010 and was the lowest in our history. This improvement is largely the result of the growth in collections from our center in India, which were $42 million in the first quarter. This was a 62% increase from the $26 million generated in 2010 and represented almost half of total call center collections during the quarter.

We now have over 950 account managers at our New Delhi site and a significant percentage of them were hired in the last year. As it takes about 12 months for new account managers to reach their peak productivity, we expect that our call center performance will continue to improve and that our cost to collect will decline as more and more recently hired account managers reach that milestone.

As the growth and mix of our employee base has important implications for our overall costs, we have included a table on page 28 of our Form 10-Q, which shows employee numbers by geography.

Legal channel collections grew to $88 million as compared to $57 million in the first quarter of 2010 and accounted for 46% of total collections. Cost to collect in the legal channel was 41.3%, down meaningfully compared to 46.2% in the first quarter of 2010.

The decline was primarily attributable to the continued refinement in our analytic capabilities and increased ability to predict consumer behavior, which has allowed us to become more precise about when to deploy this channel. As a result, our liquidation has improved, which led to a decline in our legal channel cost to collect.

I'd like to reiterate that our long-stated preference is to work with our consumers to negotiate a mutually acceptable payment plan which works within their personal financial situation. These plans almost always involve substantial discounts from what is owed to us. We not only believe that this is the right thing to do for our consumers but that this is the right thing to do for our business, since litigation is our most expensive collection method.

Unfortunately, the vast majority of our consumers choose not to engage with us to resolve their financial obligations. Accordingly, and as a last resort, we are left only with the option of using the legal channel.

The remaining 7% of collections came primarily from third-party collection agencies. First quarter agency collections decreased to $14 million from $18 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 at a lower overall cost to collect, especially as capacity comes on line in India.

We had no portfolio sales in the first quarter of 2011. As part of our new Consumer Bill of Rights, we have committed to not resell portfolios in the future.

Moving on, our revenue from receivable portfolios was $105 million, an increase of 27% over the $83 million in the first quarter of 2010. As a percentage of collections and excluding the effects of allowances, the revenue recognition rate decreased to 58% in the first quarter of 2011 from 64% in the first quarter of 2010.

Our revenue recognition rate is attributable to our conservative approach to setting initial IRRs and our policy of increasing them gradually after periods of overperformance. For example, our 2009 and 2010 vintages were initially booked at average multiples of 2.4 and 2.1 times, respectively. As a result of sustained overperformance, we have slowly increased the yields on these vintages, resulting in multiples of 2.6 and 2.3 times, respectively. With respect to 2011, we have been conservative in setting the initial multiple at 2 times.

As most of you know, we account for the business on a quarterly pool basis, not at an overall level. When pools underperform, we take allowance charges, which are reflected as an immediate reduction in revenue. We measure underperformance against the current yield that is assigned to a pool, not its original expectation.

This pool-by-pool level accounting treatment leads inevitably to non-cash allowance charges in certain periods, even when we are overperforming a pool's initial expectations.

In contrast, when pools overperform, that overperformance is not reflected immediately. Once we have evidence of sustained overperformance in a pool, we will increase that pool's yield. Unlike allowance charges, which are realized immediately, this increased yield will be reflected as increased revenue in the current and in future quarters.

During the quarter, we expensed $5.5 million in net allowance charges, compared to $7.9 million in the first quarter of 2010. Looking at the breakdown by pool, we had $600,000 of allowances in the 2005 vintage, $2.5 million in the 2006 vintage, $1.5 million in the 2007 vintage and $1.5 million in the 2008 vintage.

We had no allowance charges for the 2009 and 2010 vintages in the quarter, as has been the case since we acquired these portfolios. These pools have been significantly overperforming our booked expectations and, as such, we have increased their yields gradually.

At Ascension, our fee-based bankruptcy servicing business, revenue rose by 11% from the prior year to $4.9 million. We continue to ramp up Ascension to handle a significant increase in volume and we expect Ascension revenue to increase meaningfully during 2011.

Turning to expenses, our total operating expenses were $83 million, up from $66 million in the first quarter of 2010. Included in operating expenses for the first quarter of 2011 were stock-based compensation expenses of approximately $1.8 million and Ascension operating expenses of $4.3 million.

The income tax provision was $9 million, reflecting an overall tax rate of 38.6%. Looking forward, we want to remind investors that the tax holiday in India expired on March 31st. This expiration will likely lead to a higher tax rate going forward and, as such, we anticipate that our rate will be approximately 40% for 2011.

Finally, our fully diluted earnings per share during the first quarter were $0.54, an increase of 23% compared to quarterly earnings per share of $0.44 in the same period last year.

I'd like to end my remarks with some key points. First, our conservative approach to revenue recognition results in our setting lower initial yields and increasing them slowly, over time, as we overperform our initial expectations.

Second, the continued improvement in productivity resulting from our growing work force in India should result in continued improvements in cost to collect and operating margins. This will allow us to increase our purchasing levels in the future, while maintaining our financial discipline.

Finally, our strong cash flow will enable us to maintain our conservative approach to financial leverage.

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

Encore's first quarter performance was highlighted by record-setting cash collections and our continued robust deployment of capital in what was another strong purchasing quarter. Encore's key differentiators were at work in the first quarter and we believe they will be key drivers in 2011 as we anticipate growing cash flows and year-over-year earnings.

With that, we would be happy to answer any questions you may have. Operator?

Thank you, sir. (Operator Instructions). Our first question is from Bob Napoli of Piper Jaffray. Your line is open.

Good afternoon.

Hi, Bob.

A couple questions. The selling, general and administrative expenses, in the 10-Q it said that part of the reason for the increase was $2 million in legal costs. Is -- I mean, can you give some color on whether you expect legal costs to remain elevated throughout 2011?

Part of the increase, Bob, related to -- in legal costs, related to the secondary which we had done, so that's part of it and we don't expect that to recur. And so it will not be elevated to the level that it was in the first quarter.

It will be higher than in prior years because of the emphasis that we're placing on keeping on track with what's happening from a regulatory -- in the regulatory world. So they'll be elevated from prior years, but not as high as the first quarter.

Okay. And then the -- you booked the 2011 at a multiple of 2.0 and I understand being conservative, but, I mean, is -- are you, essentially, taking advantage of the decline in your cost to collect and, I guess, some would call it investing in pricing, if you will? I mean, are you paying higher prices? I mean, I know, you've gradually raised your collection multiples over time in the past, but you booked '11 at a much more conservative or lower number than you did 2010 initial numbers.

Well, I actually believe it's not all that different. In 2010, our initial booking was 2.1. This is slightly lower, which reflects the same amount of conservatism and just the fact that portfolios are slightly higher. It's not a recognition of any shift in our strategy. We are paying a little bit more, but we're applying the same conservative approach we did in 2010 as in 2011.

Okay. Then last question, I just -- I mean, your cash collections were, I mean obviously, really, really strong. And, I mean, what have you done differently? Is it that -- I mean, it was really -- and it was across the board. I mean, the legal side -- and you only had 12 weeks of collections versus 13, so I think you were shorted, what, $7 million of collections there. So it was even better than it looks on the surface.

So, I mean, is it -- do you feel like the collecting environment, the economy, is getting somewhat better and people have more money to pay you? Or is it just the maturation of your collection staff in India? What is -- I mean, it's -- I mean, it was much stronger than expected.

Yes, Bob, we really think it's a maturation of the business model. We've been applying a lot of analytical techniques over the last few years, especially in the legal channel, as Paul alluded to, to best target those consumers who we believe can pay who aren't engaging with us and aren't paying us and that's yielding much stronger results, year over year.

And then there is just the maturation of the -- both our domestic work force is a year older. I mean, the tenure of our work force in the US is 8 or 9 years, on average. In India we have an extra year of time and the combination of the two all came together in the quarter and we feel like that's the biggest driver.

There may be some macroeconomic effect. It's very hard for us to see that. We believe it's more a function of how we're buying and how we're collecting and how it's coming together.

Okay, thank you.

Thank you. Our next question is from David Scharf of JMP Securities. Your line is open.

Thank you. A couple questions. First, Brandon, before I kind of delve into the quarter, I'm wondering if you could talk a little bit about the outlook for supply of paper for sale this year and, in particular, I mean, we're obviously still at the point in the cycle where you've got a lot of tailwinds behind you in that so much absolute volume has been charged off in the last two and a half, three years.

I'm wondering, though, are there any headwinds on the horizon, given that relative to prior cycles we're just not seeing the card issuers grow their balances much right now? At this stage of a recovery we would normally, obviously, see more consumer leverage being taken on.

It's our belief, actually -- a lot of people have asked me the question and relate it back to the 2007-2008 timeframe where losses were actually about half of what they are, even, today. And so we believe that that there's twice the supply there was at the -- in the down years where there was low supply. We think that's going to be ample supply for the foreseeable future. Certainly it's less than it was in 2010 and 2009, but we don't believe there's going to be a shortage of supply as we look out forward.

Okay, good to hear. Shifting to the quarter, not to get too bogged down in the nuances of the revenue recognition and level yield accounting, but given how you've been steadily ratcheting up the forecasted collection multiples on the '09 and '10 vintages and the improvements in your productivity, is there a reason why, just overall, the monthly yield this quarter, I guess at 5.2%, was actually a shade lower than the year ago's first quarter?

And if I heard you correctly, you said you outperformed your collection -- your forecasted curves by 27% in the quarter and I'm wondering if that should translate into, perhaps, seeing those collection multiples being taken up more than usual over the next couple quarters?

The overperformance in the quarter results in the -- on the collection side, results in a lower revenue recognition rate overall and that's one of the reasons that the rate happened to be lower this quarter. The -- in terms of increasing in the future, we continue to monitor it every quarter.

We haven't changed our methodology and as we overperform, we'll continue increasing it slowly over time. So there's not going to be a step function change in how we're increasing yields. We'll just continue to look at it every quarter and as we and if we continue to overperform, we'll continue to increase it.

Sure. And I realize the outperformance would result in some low revenue recognition, more amortization. I didn't know if 27% was an unusually large delta for you in which we might be seeing an unusual step function.

Maybe put another way, when I look at your -- from the K, the forecasted collections for 2010 and I back out from this quarter what you collected on the 2011 purchases, it looked like you collected almost 34% of the 2011 expectations for the full year, 34% of that just in Q1 alone. Should we attribute any of that -- I mean, it's obviously the best seasonal quarter, but it's far in advance of, I think, your typical seasonal adjustment.

Should we be thinking, once again, in terms of the gross collection forecast being very, very cautious in your disclosures in the Q today for this year or was there something about, perhaps, the tax refund season this year that might have front-end-loaded more of this year's collections than usual?

I don't believe we saw any abnormality in the tax season. I think what we're saying on our side is 27% is larger than we've seen in the past. We'd like to see that for a meaningful number of quarters or at least a couple of quarters before we would have a more significant increase in the expectation, because we don't want to find ourselves in a situation of writing it up and then having the collections slow down.

So, our belief is that the forecast may be a little conservative and if it -- if the second quarter proves out to be as strong, we'll take a harder look at it, but we weren't comfortable increasing it more than we did, just given the fact it was only one quarter of significant overperformance.

Okay. Thanks very much. I'll get back in queue.

Thank you, sir. Our next question is from Hugh Miller of Sidoti. Your line is open.

Hi, good afternoon. A couple of questions. One, I guess, with regards to, obviously, the cash balance is kind of trending up a little bit higher in this quarter. I just wanted to double check and make sure that when we think about those go forward, they should probably trend back down towards the roughly $10 million area, right?

That's right, Hugh.

Okay. And I just wanted to get a sense, too, on the large portfolio that you purchased last quarter. How is that kind of performing? Obviously, it's only a quarter in that? And are you kind of hearing about discussions from other credit issuers that you feel as though they may be willing to come to market with other, larger-size deals?

On the large purchase, we did outperform our initial expectations. It is early, so we don't want to -- we won't give too much guidance. I think over time we'll try to give a little more color on that, but it was part of the overperformance and we feel very good about that transaction.

I don't think it's led to any near-term desire to -- for any of the creditors to sell large pools. So I wouldn't expect that to happen in the very near term, although we continue to believe that those large deals exist and we continue to look for them, but they tend to happen much more sporadically and -- but those conversations are always ongoing.

Right. And you kind of mentioned that you feel very comfortable being able to put money to work this year in purchases and moving to wherever you see value. Last year you kind of threw out some guidance on a targeted goal. Is there anything that you're comfortable sharing on expectations for purchasing for the year?

We think it's a little early in the year right now to do that. We will talk about it internally before the June meeting and that may be the right time to do it, but as of right now it's still a little early in the year to give a full-year forecast.

Okay. And obviously you've got a nice competitive advantage with the offshore center in India. Are there other projects that you're kind of working on or endeavors to try and leverage that, be it in your current business lines or others? Anything that you're kind of seeing right now that makes sense to share?

We're always working on things to leverage with India, but none that I think we're in a position to share at this point.

Okay. And you mentioned about seeing better value on some of the older paper relative to fresher. Can you just talk about, are you seeing any disparity between value in traditional versus bankruptcy purchases?

We're not. We think that those -- both assets -- both types of assets are being priced to similar returns, especially the fresher bankruptcies and the fresh contractual charge-offs. So we're not seeing an imbalance in yield between the two asset types.

Okay. And the last question I had was just with regards to kind of where things stand along the class action settlement process and if that kind of gets finalized and anything that you might be able to share with regards to the Minnesota Attorney General and where things might stand with that.

Sure. So, on the class action, notification went out to the consumers in April. We've got the Fairness Hearing in July. We probably won't make any comment until after that July hearing where the judge will ultimately and render a final decision.

With respect to the Minnesota Attorney General, again we'll state that that came as a surprise to us and we reached out immediately to the Attorney General's Office, have had conversations, but nothing's happened other than preliminary discussions as we try to get to know each other.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question is from Mike Grondahl of Northland Capital. Your line is open.

Yes, congratulations on a good quarter, guys, and thanks for taking my questions.

Real quick, how should we think about leverage going forward? I mean, you guys were able to purchase $90 million of paper and pay down debt, which is very impressive. I mean, how do we think about that leverage going forward?

Mike, I mean, we'll continue to be conservative as it relates to leverage. To the extent that we continue to collect the way we have been, even if we do deploy meaningful amounts of capital for purchases, leverage could come down. It's all going to depend on the opportunities we see in the market to buy portfolio and our collection levels each quarter. So it's going to be dependent on both of those.

We have a lot of capacity within our current facilities to spend on portfolio purchases and we're going to maintain that capacity to the extent that there are opportunities we see out there that we feel are appropriate to deploy the capital that we have.

And then, secondly, in the Q it talks about $137 million of purchase commitments at the end of the quarter, the March quarter. How does that compare to a year ago? And how long do you think it takes you to deploy that or to acquire those portfolios?

I actually don't know the comparison to last year and I believe -- and I'm looking at Paul -- those are the commitments for -- that will occur in the next 12 months, most of which will be in the next six months.

Okay. And then -- and lastly, just real quick, zero basis accounts, your collections there were $3.6 million, up from about $2 million. How do you expect that to play out over the rest of '11 and '12?

So the zero basis accounts will probably be at levels similar to where they were in the first quarter, at least for the next couple of quarters. We have -- while zero basis accounts on a vintage year basis have declined, there are more pools that are now zero basis this year than there were a year ago. So right now all of the pools through the second half of 2004 are now zero basis accounts or zero basis pools and more of them are coming -- are reaching zero basis states.

So if you look at it on a vintage-by-vintage level, they're declining but as more become zero basis, the level of overall zero basis collections increases a little bit. So I would expect it to stay at similar levels to where it was this quarter for the next couple of quarters.

For the next couple? Okay. Thanks a lot.

Thank you. Our next question is from Edward Hemmelgarn of Shaker Investments. Your line is open.

Yes, I've got a question regarding the differences in collection rates between the sites in the US and the sites in India and maybe you could help with just a little bit more detailed explanation of it. By my calculation, you got at the end of the quarter a little over 4 times as many collectors in India and you've collected a little less than half of what -- of the total collections, so your productivity in the US was somewhere north of 4 times.

Is that due to-- I guess you talk about the age or the maturity of your collectors. Is that due to the fact that they're just -- it takes a while to become more productive? Or how much of that is also payment plan, as the debtors get to be -- instead of making lump sum payments now, there tend to be more and more are making payment plans? What is the influence of both of those, relatively?

And then, ultimately, do you expect to get a similar ratio of productivity out of the Indian collectors versus the US collectors?

So this is a complicated answer, so I'll try to make it as simple as possible. One of the things that we think we do very well as a company is segment our outbound work collections into groups rather than kind of just doing it on average. And so we've got specialized teams that reside both domestically and in India.

Many of those specialty teams, which are high-cash-average teams, reside in the US, largely because of the tenure of our team that's here. And so they're -- it's not an apples-to-apples comparison. Where we actually do work the same portfolio in India and the US, we get the same results. So if there are like work groups in India and the United States, you're going to see similar results, but there is a disparity in work groups.

The second thing is and, more importantly, as we said earlier, is, there's a significant number of the employees we have in India working accounts which are much lower yielding, which we couldn't work in the US. And so the average for those collectors is going to be significantly less, but they're all accretive to the Company.

And in the end, what I'm trying to say, it can be very hard to compare the two, but we believe in an apples-to-apples comparison we get the same yield. We just have a lot of people working low-yielding portfolio in India and a lot of people working very high-yielding portfolio in the US.

What, roughly -- right now, when you look at your collections, how -- and I realize there's always an ongoing effort to keep the collections going on, so it's -- you can't separate it out precisely, but what percentage of the collections that you get in a quarter are coming from collection plans started in a -- before the quarter ever began, versus how much are basically new collection plans that were just started in that quarter? So, I mean, is it 80/20, 50/50? What's the ratio?

I don't have the exact number. I can tell you there is a meaningful percentage of collections that come from established payment plans coming in to any quarter. But I, quite frankly, can't give you the exact percentage.

Can you give a ballpark, or --?

I'd hate to guess.

Okay. All right. Thanks.

Thank you. (Operator Instructions). We have a follow-up from Bob Napoli of Piper Jaffray. Your line is open.

Your bankruptcy business, looking at the Q, it looks like you bought just like $1 million, $1.4 million or something like that. Is that right? And, I mean, what are -- do you have any updated thoughts on the bankruptcy paper versus the core paper in your future? I mean, have you -- it doesn't seem like you're sold on that business, quite yet.

I think we continue to take a conservative approach on the bankruptcy portfolios. We do -- we have seen pricing come up meaningfully in the last six months and, given the volume of portfolios in our core business, we're more comfortable buying where we have higher returns and more predictable returns.

We still like the business and still continue to learn from it, but we don't think, right now, the pricing is at a place where we're going to deploy a significant amount of capital in the near term.

Okay. I mean, but I thought I -- did you say earlier that you thought that the returns today in the market on bankruptcy and core business were about the same, or not? That's what I thought I heard.

That's true. Our confidence around our ability to execute, though, is different. So since we know the portfolio in our core business better, we've just shifted more there, because we think there's more variability of returns around the bankruptcy space.

Okay. So we shouldn't expect you to see -- to see you ramp up bankruptcy purchases much any time in the near term?

That's correct.

Okay. And then of what you are buying, how much of it is flow business? Are there more flow deals out there today?

Again, I don't know the exact percentage. A significant percentage of what we buy is flow business and there are constantly deals that are being marketed, especially since issuers have gone to shorter duration flows. So many of the -- many of the issuers are going to three-month flows and that means we're always in the market to be buying flow portfolios and we expect that to be a significant portion of what we buy this year.

Banks, obviously, sat on a lot of paper that they charged off, a lot more than normal, over the last couple of years. I mean, are you getting a consistent sense that they're ready to start unloading some of this paper? Or, I mean, do you think that they may decide to collect more of it internally than they have done historically and just hold on to it?

We are actually starting to see that volume come into the system. It's not a wave of it, but especially banks that shifted their sales strategy to hold it for a year or year and a half, the volume in those transactions have gone up meaningfully. So we are starting to see it come in, but we don't expect it to be one big wave.

Okay. And then last question, any thoughts on the M&A front? I mean, you guys haven't done any M&A in quite a while and, I mean, with your balance sheet deleveraging as much as it is and, I mean, there may be more than enough opportunities in your core business, but do you have any thoughts around M&A or looking for ways, through M&A, to leverage your India capabilities?

Well, we certainly believe we've got several assets that could be used elsewhere, both our deep understanding of the consumer and our platform in India. With that said, we're always looking to see if there are ways to grow in risk-adjusted ways that are additive to our shareholders and that will continue to be part of our strategy. We just haven't found the right thing to do at the point.

Thank you.

Thanks, Bob.

Thank you. This ends the Q&A portion of today's call. Ladies and gentlemen, I want to thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.