Encore Capital Group Inc (ECPG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Encore Capital Group second quarter 2011 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

I would now like to turn the call over to your host, Ren Zamora, Director of Finance. You may begin.

Thank you, Patrick.

Good afternoon and thank you for joining Encore Capital Group's second 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 that speak only as of the date that they are made and which reflect management's current estimates, projections, expectations, or beliefs and which involve risk 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 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 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 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 operating expenses excluding stock-based compensation expense, and bankruptcy servicing expenses to the GAAP measure of 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 second quarter conference call. We were pleased to host many of you New York for our annual investor day in June. At that presentation, we discussed Encore's competitive strengths and outlined a number of exciting new growth initiatives. Since that meeting, we have continued to invest in areas that will provide long-term strategic advantages and build upon our industry-leading portfolio liquidation and cost to collect platform.

Our disciplined approach to portfolio underwriting and management led to record earnings, collections and operating cash flow in the second quarter. We also increased our investment receivable portfolios while reducing the Company's overall leverage.

Cash collections in the quarter were $195 million, which was a 24% increase from the second quarter of 2010. This was also a quarterly collections record and a significant accomplishment for our company. The strong second quarter collections were the result of our ability to identify and engage those consumers with the greatest likelihood of recovery, as well as our continued emphasis on increasing the percentage of accounts that we can work profitably.

Our overall cost to collect declined 250 basis points, to 40.9% from 43.4% in the second quarter of 2010. We remain focused on improving our overall cost structure, continuing to expand our operations in India, and making significant investments in our analytics and consumer intelligence platform.

Our consumers payment behaviors remain strong and continue to improve as compared to prior periods. We saw payer rates across our entire portfolio increase by more than 7% when compared to 2010, while payment sizes remained consistent. We attribute the improvement in payer rates in part to enhancements in our operational capabilities, such as the increasing tenure of our collector workforce and in part to continual improvement in our analytic abilities.

Our operations center in India continues to expand and drive an increasing percentage of total call center collections. At the end of the second quarter, the total number of employees in India was just under 1,400, up nearly 26% from the same period in 2010. I would like to take a moment and commend our team India for its recent placement in the Top 50 of India's Best Companies to Work For competition, conducted by the Great Place to Work Institute. This award marks a significant milestone for our operational center and is testimony to the employee-centric approach that is integrated and practice across our Company globally. We are very proud of this accomplishment, and look forward to many more years of being recognized as a top employer in India.

Continuing a trend we've seen for several quarters, operating cash flow, or adjusted EBITDA, grew at a faster rate than cash collections. This is reflected in the second quarter adjusted EBITDA of $116 million, a 29% increase from the second quarter of 2010. 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.

During the quarter, we deployed $94 million to purchase $3 billion of portfolios, which is a 12% increase as compared to the prior year. The vast majority, or $88 million, went toward the purchase of credit card portfolios. Additionally, we spent $5 million on telecom receivables. Overall, during the quarter we completed 62 individual purchase transactions from 14 unique sellers.

Portfolio prices appear to be increasing moderately, and this continues to be most apparent for the newly charged off, or fresh, portfolios. Although we expect 2011 pricing to continue to be higher than 2010 levels, we anticipate that we will still be able to buy portfolios at attractive returns throughout this year and are comfortable with our 2011 purchasing target of $380 million.

Our outlook regarding portfolio purchases is based largely on the strength of our operating platform, which is underscored by an underwriting philosophy at the individual consumer level that is focused on willingness and ability to pay, rather than asset type or age of receivables. During the past decade, we've evolved our purchasing strategy to accommodate a broad range of delinquency characteristics and maximize internal rates of return. As mentioned at our recent investor day, we have been able to find mismatches between portfolio returns and market clearing prices, and we will continue to capitalize on these.

Following up on the strategic initiatives announced at our investor day, our internal legal and near-shore call center projects are still on schedule. Within our internal legal channel, we began to generate collections during the quarter and are on track to be operational in six states by the end of the year.

We're still focused on either Panama or Costa Rica as the location of our near-shore operations site, which will serve our growing number of Spanish-speaking consumers. We should have the location finalized within the next couple of months, and are expecting to be in operations in early 2012.

We recently announced the addition of Shailendra Kumar to our senior management team, as the Vice President of Global Operations. Shailendra has spent more than a decade working with near-shore and off-shore operations and he will be leading our near-shore initiative. We are excited to have him on board.

Before turning the call over to Paul, I wanted to provide an update on the status of the Brent lawsuit and the related affidavit cases. On July 11, the Court held a fairness hearing on the proposed settlement that was preliminarily approved by the same federal judge back in February. While the judge has not yet issued a final decision, we continue to believe that the settlement was a fair one, and that the judge will rule accordingly. We understand that the presiding judge is now in the middle of a completely separate trial and as such, we do not expect to have an update until that trial concludes.

On a related note, we have also engaged in discussions with the offices of the various attorneys general that are focused on affidavit-related issues. Our goal is to work cooperatively with them to explain our business model and practices as we answer their questions. We are specifically addressing the most recent request from the Texas and Minnesota Attorneys General. We believe that both offices have taken an action based on a number of misconceptions and we intend to vigorously defend against their claims.

As you all know, Midland was the first company in the debt collection industry to create and adopt a Consumer Bill of Rights, which codified Midland's dedication to resolving accounts quickly and honestly, ceasing or suspending collection efforts when the consumer is facing certain types of hardship, engaging in collection practices that promote settlement and preserve consumer dignity, and using litigation fairly and reasonably to resolve outstanding obligations.

With that, I will turn the call over to Paul, who will discuss our financial results in more detail. Paul?

Thanks, Brandon.

As Brandon discussed, we had very strong second quarter, Collections were an all-time high and our continued improvements in productivity reduced the cost to collect meaningfully. As a result, we generated earnings of $0.58 per share during the quarter and deployed nearly $94 million on purchases, even as we decreased overall leverage. Adjusted EBITDA, which represents cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $116 million in the second quarter, an increase of 29% compared to the $90 million reported in the second quarter of 2010. This improvement allowed us to fund all portfolio acquisitions during the quarter, while maintaining quarter-over-quarter net debt levels.

Our leverage ratio declined from 1.1 times trailing 12 months adjusted EBITDA at the end of 2010 to less than one time at the end of the second quarter of 2011. Our overall cost to collect declined 250 basis points, to 40.9%, from 43.4% in the second quarter of 2010. Sequentially, our cost to collect increased slightly in the second quarter, from 40% the first quarter, due to the ramp up of our internal legal team, additional legal costs related to our defense of the Brent litigation, and related matters. Overall, we expect this 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. However, this ratio will fluctuate from quarter-to-quarter, based on seasonality, initiatives like our internal legal platform, and our near-shore site, and ongoing legal costs related to governmental discussions and other open legal matters.

One item to note is that we have recently expanded our corporate footprint in San Diego. As a result of our continued growth and success and the expansion of our internal legal team, we physically grew beyond our existing facility. As result, in June we added approximately 30,000 square feet of office space at a second site in San Diego. Over time, this dual presence will add approximately 150 new employees in San Diego. While we often speak about our growth in India, this expansion in San Diego continues the trend of hiring domestically in all four of operating sites. In fact, our domestic work force has grown by 20% in the past year and is expected to grow at a similar rate over the next 12 months. The new facility will add approximately $800,000 in annual rent expense to the P&L that we believe the added capacity will help us achieve further economies of scale in the long-run, in line with our expected growth.

Primarily due to increased levels of portfolio purchases in the second half of 2010 and the first half of 2011, we increased our estimated remaining collections, or ERC, at June 30, 2011 by $135 million over the prior year, to $1.4 billion. As we've discussed previously, we believe that ERC, which reflects the remaining value of our existing portfolio, is conservatively stated because of our cautious approach to setting initial curves and our practice of only increasing future expectations after a sustained period of over performance.

Moving on to other financial results, this quarter's collections were the strongest in Encore's history at $195 million, up 24% from $157 million during the same quarter last year. Our call centers contributed 44% of total collections, or $85 million for the quarter, as compared to $67 in the second quarter of 2010, representing 42% of total collections. Direct cost per dollar collected in our call centers declined to 8.4% for the second quarter of 2011 from 9.5% in the second quarter of 2010. This improvement is largely the result of collections growth from our center in India which increased 50%, from $28.1 million during the second quarter of 2010 to $42.4 million in the second quarter of 2011. India represented half of total call center collections during the quarter.

We now have nearly 1,000 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 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've included a table on Page 34 of our Form 10-Q which shows employee headcount by geography.

Legal channel collections grew to $98 million as compared to $68 million in the second quarter of 2010 and accounted for 50% of total collections. Cost to collect in the legal channel was 41.5%, down meaningfully from 45.9% in the second 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 systematically more precise about when to pursue litigation. We also expended approximate $800,000 in costs this quarter associated with the build of our internal legal platform.

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 it 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 often left only with the option of using the legal channel.

The remaining 6% of collections came primarily from third-party collection agencies. Second quarter agency collections decreased to $12 million from $22 million in the second -- in the prior year, reflecting changes in our operating strategy that have seen us shift more of our work to internal call centers at a lower overall cost to collect, especially as capacity continues to come online in India. Consistent with our past practices over the past couple of years and in keeping with our consumer Bill of Rights, we had no portfolio sales in the second quarter.

Moving on, our revenue from receivable portfolios was $111 million, an increase of 21% over the $92 million in the second quarter of 2010. As a percentage of collections and excluding the effects of allowances, the revenue recognition rate decreased to 57.5% in the second quarter of 2011 from 60.4% in the second quarter of 2010. Our revenue recognition rate is attributable to our cautious approach to setting initial IRRs and our policy of increasing them gradually after the periods of over performance.

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 over performance, we have slowly increased the yields on these vintages to 2.6 and 2.3 times, respectively. As most of you know, we account for the business on a quarterly pool basis, not at an overall level. When pools under perform, we take allowance charges, which are reflected as an immediate reduction in revenue. We measure under performance 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 over performing a pool's initial expectations.

In contrast, when pools over perform, that over performance is not reflected immediately. Once we have evidence of sustained over performance 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 $1 million in net allowance charges, compared to $2.8 million in the second quarter of 2010. Looking at the breakdown by pool, we had $1.2 million of allowances in the 2006 vintage, $400,000 in the 2007 vintage, and $700,000 in the 2008 vintage. These allowances were offset by $1.3 million in reversals. We had no allowance charges for the 2009, 2010 or 2011 vintages in the quarter, as has been the case since we acquired these portfolios. Several of these pools have been significantly over performing our booked expectations and as such, we have increased their yields gradually.

Turning to Ascension, our fee-based bankruptcy servicing business, revenue rose by 3% from the prior year to $4.5 million. While we don't normally spend a great deal of time on Ascension, due to its size as compared to our overall business, there were some notable decisions made in the second quarter as result of Ascension's near-term performance.

Earlier this year, we saw Ascension transition from a very -- from very consistent new placement volumes to dramatically increasing volumes. Thus, despite a significant amount of preparation, we did not generate the expected level of profitability. Specifically, one large new client's results have so far turned out to be meaningfully below our expectations. Accordingly, we have begun discussions with this client, which could lead us to either renegotiate or discontinue the relationship. Moreover, we have also made senior management changes in order to align managerial experience with the evolving needs of the Ascension team. Despite these present challenges, which we believe we are addressing fully, we are very confident that through Ascension, we will create a significant presence in the bankruptcy servicing space. In addition, we anticipate that we will achieve Encore's overall growth targets, despite the near-term shortfall at Ascension.

Turning to expenses, our total operating expenses were $86 million, up from $73 million in the second quarter of 2010. Included in operating expenses for the second quarter of 2011 were stock-based compensation expenses of approximately $1.8 million and Ascension operating expenses of $4.7 million.

The income tax provision was nearly $10 million, reflecting an overall tax rate of 39.1% as compared to 36.5% in the second quarter of 2010. The increased tax rate was attributable in part to the increase in the effective tax rate in India, as the tax holiday expired on March 31. We anticipate that our overall tax rate will be approximately 40% for 2011. Finally, our fully diluted earnings per share during the second quarter were $0.58, an increase of 23% compared to quarterly earnings per share of $0.47 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 over perform 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 second quarter performance was highlighted by record-setting cash collections, and continued deployment of capital and strong returns. Encore's key differentiators were at work in the second quarter, and we expect they will continue to be key drivers in the growth of cash flows and year-over-year earnings that we anticipate in 2011.

With that, we would be happy to answer any questions you may have. Operator, please open up the call.

(Operator Instructions) Our first question comes from David Scharf from JMP Securities. Your line is open.

Thank you. Good afternoon. A couple things. Drilling down on the legal collections, obviously on an absolute basis, it is the highest cost channel to collect in. It looked like your mix of collections coming from legal was about 50% this quarter, which is the highest we've seen. Is there anything going on in the industry that's kind of leading you to place more, whether it is your nascent internal legal or your attorney networks? Is 50% kind of a good mix to think about going forward, at a more elevated level than historically?

We've actually fluctuated around the 50% mark for the last few years. It was down over the last few quarters, but it is not outside the normal range, actually. And it's more of a function of our ability to target those accounts we think are more likely to respond through legal process, because of lack of engagement in the -- through the mail or through phone calls. So it is not a function of significantly increasing placements. I think it is a function of just the natural ebb and flow of our business, and the fact that we're getting better at finding those consumers who we think will respond through that process, when they don't respond to phone calls or to letters.

Got you. And can you remind me, I might have just not have written it down, what portion of legal expenses this quarter would be deemed to be sort of investment spending, in internal?

They are about $800,000.

$800,000, okay.

And Paul, maybe circling back to your ending comments about accretion, and where you're booking the curves; we appreciate the conservatism. Just looking at the forecasted collection multiples by vintage, it looks like 2009 and 2010 vintages in particular were not -- those multiples didn't increase at all from your March filing. I think they may have increased a little bit from December to March. Anything to read into that, or is it just general conservatism? Or you notice anything in terms of consumer behavior that's changed noticeably in the last 3 months?

No, there's nothing that we've noted that changed in terms of the behaviors in consumers there. We do continue to look at those every quarter. And as I've said, we take a moderate approach, and those particular pools have overperformed. To the extent they continue to do that, we will increase those multiples over time. Just a quarter-over-quarter analysis, and we will continue to increase them to the extent they continue to overperform.

Okay. Thank you. I will get back in queue.

Thank you. Our next question comes from Hugh Miller from Sidoti & Company. Your line is open.

I had 1 question, on a housekeeping perspective, with regards to -- you mentioned the investment in legal for the quarter. Do you have a sense of what the unusual costs were associated with issues like the Brent case and some of the other filings that were filed since then during the quarter?

So, without giving you an exact number, because I think it will ebb and flow, it's averaged $2 million for the last few quarters.

Okay. So a few million?

Yes.

Okay. And getting to some questions with regards to the legal channel. Looking back, it seems like the legal in this quarter was a little stronger than I anticipated, but that you usually have seen kind of a little bit of a pickup from Q1 to Q2. To my knowledge, I don't think there's a ton of seasonality in that with regards to collections, but is that just a factor of account placements and timing from your perspective, or is there anything that generates that phenomenon of sequential rise from Q1 to Q2 in legal collections?

Nothing in particular. The only thing that could influence it is -- collections right at the end of the first quarter get posted the beginning of the second quarter. That could have some influence, considering March is a good collection month, whereas the first quarter you have December collections going into January. So there's some timing of the posting of that. But other than that, there's no underlying trends or themes that you should be drawing out of that.

Okay. And then looking at the collections for hour paid, it looked like it was up about 7.5% on a year-over-year basis in the second quarter. I assume that a lot of that is driven by the offshore collectors coming up the learning curve here, but is there anything else that you're kind of seeing that's causing that improvement?

Yes, we do think primarily the maturation of the workforce, both domestically and in India. I also think we continue to find pockets of accounts that we are able to work differentially through certain groups of account managers. And that will also drive increases year-over-year. So, it is both the individuals maturing, and then us getting better at working accounts on a segmented basis that drives some of the collections per hour.

Okay. Last question I had was, I guess in looking through the numbers here, on a per share basis, obviously the impairments seem like they were down considerably in the quarter, with zero basis collections kind of being somewhere on par from the first quarter. I guess I was just surprised at the revenue recognition rate in the June quarter. Given the decline in impairment charges, it would've been up a little bit higher, but what else could be weighing on that in this particular quarter other than just mix, I guess?

Are you referring to the revenue recognition rate, Hugh?

Yes.

I think if you look at the revenue recognition rate over time, with a -- if we step back for a minute, and look at where it should be with a 2.5 multiple, the revenue recognition rate should average about 60%. So that's what a 2.5 multiple will generate, from a revenue recognition rate perspective. And obviously, from one quarter to another quarter, there are things that will make that go up or down. Being moderate or cautious in setting initial curves early on would cause it to come down. Zero basis and reversals of impairments would cause it to go up.

But on average, it should be there. And there's nothing specific to this quarter that brings it in at 57.5%, compared to anything else. But I think it is important just to take that into account that, on average, at a 2.5 multiple we're going to get to about 60%.

All right. Thank you.

We may be a little bit over the 2.5, but that's where we should be trending.

Okay. Thank you.

Our next question comes from Robert Riggs from William Blair & Company. Your line is open.

Hello. Just had a few questions on the India operations. Any change in the level attrition in India, either good or bad? And then if you could just quickly touch on how you feel about your ability to continue to bring on talent at the management level?

I believe attrition is slightly better this year in India than it was last year. But not to a very large degree, but we are seeing it trending in a positive direction. I think things like being included on the Top 50 Companies to Work For in India list actually expands our ability to attract talent. If you're someone who's considering -- a talented person considering where to work, being included in a prestigious list like that I think actually bolsters our ability to do that. So we are more excited than ever that we can attract talents to the site there.

Great. And then you've talked about moving some of your back-office work to India -- to use a baseball analogy, kind of what inning are you there, in terms of the work that you can move over? Thanks.

That's a good question, on innings. I think we're just in the beginning of the game, to be honest with you. Certainly, from a collection perspective, we're later in the game. But we've never actually moved jobs from the US to India, but as we've expanded, we've built incremental capabilities there. And I believe as we get success in areas like analytics and software development, it gives us confidence thinking about expanding other areas there. So I believe we're just starting to scratch the surface on the types of work. But that will be incremental growth opportunities, not the movement of roles from the US to India.

Great. Thank you.

Thank you. Our next question comes from Sameer Gokhale from KBW. Your line is open.

Hello. Thanks. I just had 1 question, guys. Just in terms of the purchases -- and I saw this from one of your peers as well, but you referenced the pricing being a bit higher, but still there being attractive opportunities to buy portfolios. And this is not just you, but also for some of your other comps in this space, but you see companies paying down debt, and I was wondering why that capital isn't being used to buy more portfolios? Do you think that the pricing environment is going to improve? Are you trying to wait, maybe, to do larger acquisitions next year if pricing improves? Are you trying to time it, or is it just that you have maximized on what you were budgeted to spend for the quarter, and so you didn't buy a lot more than you could have, perhaps?

I think if you step back a little bit, the fourth quarter and the first 2 quarters this year represented sort of a significant increase in purchasing over the prior 9 months. So we didn't find ourselves constraining our purchases by a budget per se, but we are always trying to balance capacity and ability to buy. We bought a significant amount in the last 9 months, and we think we can continue to do so, while remaining aware of the fact that in some places the pricing has gotten to the point where we won't deploy as much capital.

The example we've given is the fresh space, where we're currently not deploying a lot of capital, because we believe the pricing is just not favorable in that sense. But there are plenty of portfolios in other places. So we're just making sure we deploy capital where we can actively collect on it, but it is not a timing play at all. It is not trying to guess where pricing is going to go.

That's helpful, Brandon. And then, just if you can remind me, I might have missed this in your Q or the release, but your bankruptcy purchases, and what kind of color can you give us there as far as pricing for BK paper?

We bought very little in the quarter, this past quarter. I think less than $1 million. We see pricing in bankruptcies to be similar to fresh paper -- very competitive, up meaningfully year-over-year. And while we still think that is a growth area for us in the future, right now it is not a big focus for us, given the price increases.

Okay. That's all I had. Thank you.

Thank you.

Thank you. Our next question comes from Jack Sherck from SunTrust. Your line is open.

Thank you very much. Brandon, you mentioned that payer rates were up 7% in the quarter, year-over-year. Do you have that number for what it was in 1Q, or know off the top your head?

I believe -- let me get this for you -- I believe payer rates were up about 10% first quarter, year-over-year. So this quarter was slightly less than the first quarter on a year-over-year comparison.

Right. And I assume some of that is the seasonality.

And then, on the BK costs there, now on the bankruptcy service unit with Ascension, was that just that little -- a hiccup you mentioned more 1-time in nature, the increase for selling cost there, versus revenue?

We did have some extraordinary costs in the second quarter. Although Ascension is likely to be less profitable for all of 2011 than our initial forecast. But likely to be more profitable in the next 2 quarters than it was in the second quarter.

Great. Thank you very much.

Thank you.

Thank you. (Operator Instructions) Our next question comes from David Scharf from JMP Securities. Your line is open.

Thank you. Just a few more follow-ups. Looking at my notes, I think on the first quarter call you had mentioned that collections outperformed your curves by 27%. Is there a similar figure you can revise with for Q2?

We don't have that with us here right now, David.

Okay. I can follow up afterwards.

And also, Brandon, I believe you gave a figure for, roughly how much you've been incurring the last few quarters related to the Brent matter. Were the legal expenses -- or G&A related to that case in Q2, similar to Q1, up or down? Just trying to get a little sense, once again, for sort of 1-time type costs.

I think they are -- Paul's looking it up -- I think they are fairly similar Q2 to Q1. It's been a pretty consistent run rate for the last few quarters, actually.

Okay. Good.

And last question relates to, I think, the prior question related to pricing, and how you are thinking about where it is heading from now. It looks like from March to June 30, your forward flow commitments came down considerably, sort of cut in half, from $137 million to $70 million. Should we read anything into that, in terms of fewer commitments because you think pricing might come down, or is it just most of the flow deals are all for fresh, and you think the pricing is too high? Not quite sure how to interpret that trend.

The way I would interpret it is -- a lot of forward flow commitments we closed in the second quarter. Throughout the year, there are always portfolios that come up for bid. Some of those portfolios are up for bid right now. And, assuming we win them, they'll end up back in the table.

Okay. Thanks a lot.

Thank you.

Thank you. (Operator instructions) Our next question comes from Edward Hemmelgarn from Shaker Investments. Your line is open.

Great. Just 1 question. You've talked about how your costs are continuing to come down for collections. Do you think that, or are you finding now that that is allowing you to go after smaller balances than you would have historically gone after?

I believe that's true. An example we've used thus far are the telecommunication receivables, where we spent about $5 million in the quarter, and expect to accelerate that investment throughout the rest of the year. But that is one area that our cost advantage allows us to go out and explore. And there are other smaller balance asset classes that we are actively looking at.

Do you actually -- or do you think that this will also, would lead to greater collections than historical and zero balance accounts are [yours], just that you would get a chance to mine those more because your costs are coming down?

If it did, it would be years from now. So it may, but it is not an effect you'd see for the next couple of years.

Okay. Thanks.

Sure.

Thank you. I'd like to turn it back over for closing remarks.

We appreciate everyone joining us on the call today, and look forward to talking to you in a couple of months. Thank you very much.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.