Encore Capital Group Inc (ECPG) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Encore Capital Group announces fourth quarter and full year 2012 financial results conference call. (Operator Instructions).

I would now like to turn the conference over to Adam Sragovicz. You may begin.

Thank you, Latoya. Good afternoon and welcome to Encore Capital Group's fourth quarter and full year 2012 earnings call. With me on the call today are Brandon Black our President and Chief Executive Officer, and Paul Grinberg our Executive Vice President and Chief Financial Officer. Brandon and Paul will make prepared remarks and then we will be happy to take your questions.

Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the full year of 2012 and the full year of 2011. Throughout the call, we will use forward-looking statements, including predictions, expectation, estimates, or other information that might be considered forward-looking.

While these forward-looking statements represent our current judgement, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you against placing undue reliance on these forward-looking statements, which speak only as of the date they are made. We will also use rounding and abbreviations in our conference call for the sake of brevity. For more detailed numbers and explanations, please refer to our form 10-K that was filed today with the SEC.

We will also be referencing both GAAP and non-GAAP financial results. We believe certain non-GAAP financial measures provide useful information about our business. However the presentation of this additional information should not be considered an alternative to, or more meaningful than, our results prepared in accordance with GAAP.

Management utilizes adjusted EBITDA, which is similar to a financial measure contained in convants used in our credit agreement, in the evaluation of our operation, and believe 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, in order to facility a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented.

Once again, please be sure to see our forms 10-K,10-Q and other SEC filings, including a press release issued as an exhibit to our current report on form 8-K filed today, which includes a reconciliation of non-GAAP financial measures, for a more complete discussion of these factors and other risks. As a remind this conference call will also be made available for replay on the Investor section of our website, and we also plan to post the prepared remarks following the conclusion of this call. With that, let me turn the call over to Brandon Black our President and Chief Executive Officer.

Thank you, Adam, and good afternoon everyone. I appreciate you joining us for a discussion of Encore's fourth quarter and full year 2012 results. I am pleased to report that 2012 was an exceptional year for Encore. We delivered strong financial results while making investments we believe will strengthen our core business, provide long-term strategic advantages, and position our Company to succeed in an increasingly complex regulatory environment.

Our strategy and deliberate and disciplined approach to portfolio underwriting and management again drove record earnings, record collections, and record operating cash flow for both the fourth quarter and the full year. Of course, none of this would be possible without our more than 2,800 employees. I appreciate their daily commitment to our Company and their willingness to help our consumers resolve their past financial obligations.

To put our performance in to context I would like to take a step back and look at our progress over the past three years. In 2009 we recorded collections of $490 million. This year we collected $950 million. Nearly double the amount from just three years ago. We have delivered these strong results thanks to the deep insights we have developed in to consumer behavior over the past decade. We are seeing similar results in our cost-to-collect. In 2009 our cost-to-collect was 47.6%, in 2012 our cost-to-collect was 40.4%, a decrease of 720 basis points. This meaningful reduction in cost-to-collect translates into a savings of almost $70 million or $1.60 in earnings for 2012 alone.

These savings have been achieved through various operational strategies including stopping collection efforts on accounts where we believe the consumer has a limited ability to pay. The lower cost-to-collect has allowed us to develop our Internal Legal initiative, expand our operating site in Costa Rica and make the investments required to manage the changing regulatory and legislative environment. All of this adds up to earnings for fully diluted share from continuing operations of $3.04 in 2012. That is an increase of 125% over our 2009 earnings of a $1.36. Clearly our team has been executing the right strategy for the current environment and have built our success year after year.

In addition to our outstanding front line employees I believe our performance also speaks to the strength and depth of our management team. We have hired leaders from world class organizations and they have brought in best-in-class practices to all areas of Encore's. Our full year purchases $562 million were a 45% increase over 2011 and above the $500 million target we discussed at our investor day. Included in the year's acquisition volume were two large purchases from competitors including one this quarter.

Each of these purchases was the result of industry participants winding down their businesses confirming our thesis of industry consolidation. For the quarter we completed a total of 41 individual transactions from 11 unique sellers for a total of $154 million. We took advantage of a number of privately negotiated deals in both our core asset classes as well as the bankruptcy space where we completed a large acquisition of a performing portfolio.

Across the industry pricing continued to be elevated and we saw that in the fourth quarter. That said, Encore is in the enviable position of having built the Company by acquiring portfolios across the delinquency and product spectrum. With this depth of experience, we understand what prices are profitable and where to draw the line. In contrast many of our competitors have a limited range of purchasing targets or lack the analytical sophistication to underwrite profitable portfolios.

We will remain selective during this cyclical period of high and in some cases irrational pricing. Predicting the speed and scope of the industry consolidation is, of course, impossible. However we are prepared both operationally and financially to take advantage of strategic opportunities to increase shareholder value as they emerge. Given the unpredictability of consolidation our purchasing volumes may fluctuation from quarter-to-quarter. Our long term goal is to deploy enough capital across all asset classes including tax lien transfers to generate 15% to 20% earnings growth process.

As a testament to the advances in operations and analytic that we highlighted earlier we are pleased to report some additional details on the large transaction that we completed in the second quarter. We have already collected 40% of the purchase price within the first seven months of ownership, which is in line with our expectations. Our performance validates our conservative approach to evaluation and our ability to manage extremely complex transactions.

One of the other note worthy accomplishments of 2012 was the acquisition of Propel. I am pleased to report that the integration of the business is now complete. As part of the integration we began deploying our legislative strategy and have enhanced the tax lien transfer origination process. Our focus now shifts to leveraging our combined strengths to drive the business forward and meaningful increase origination in the early part of this year when the annual delinquent tax roles are released. We believe this is a real opportunity to help family and business owners who need a flexible and affordable option to meet their property tax obligations.

As proud as we are of our financial accomplishments, we are equal proud of the work we have done to strengthen the industry and cultivate an innovative an engaging corporate culture. In keeping with our commitment to treating consumers fairly as detailed in our Consumer Bill of Rights, Encore's Senior Vice President of Business Development, Amy Anuk , was instrumental in leading a cross industry effort to create a certification program for members of the Debt Buyers Association. This certification will help ensure that industry participants operate with the highest ethical standards. Similarly Ashish Masih our Senior Vice President of legal collections has taken a position on the Board of the Debt Buyers Association giving Encore yet another avenue for driving high standards and ethical behavior across the industry.

Another important undertaking is Encore's Consumer Intelligence Center of Excellence the Consumer Credit Research Institute or CCRI. It is continuing to address important questions related to financial distress, credit behavior and consumer psychology. As many households continue to struggle efforts to provide relief through policy and educational channels are hampered by a lack of information about subprime consumer behavior. CCRI was design to help address this, and we recently completed a first of its kind study that compares prime and subprime consumers. This work was done in collaboration with scientists from UCLA.

Our study found that subprime consumers relative to prime consumers are more likely to struggle with numeric and financial literacy concepts, misjudge their relative credit worthiness and place greater emphasis on short term planning. These cognitive and behavioral difference are important and provide an unique means to which we can enhance our consumer interaction model and promote financial recovery. Additional information about this study and other work being conducted at the CCRI can be found at www.encoreccri.org.

In December we also announced a exclusive partnership with Payoff.com, which uses goal setting rewards and other incentives to help consumers change their behaviors. This relationship will add to our understanding of financially stressed consumers, and enable us to better align and help with their recovery. Taken together we believe that our efforts to drive higher standards throughout the industry and develop new insights into financial stressed consumers position us well to engage and make a difference in industry, regulatory and policy conversations.

We are also excited to be recognize once again along with companies like Google and American Express as one of India's 50 best places to work by the Great Place to Work Institute. We were also named as one of Fortune's 100 fastest growing companies for the second year in a row as well as one of San Diego's healthiest companies. Propel received the distinction of being one of the top work placed by the San Antonio Express News. We appreciate greatly that the importance we place on human capital strategy has been recognised by the market place and more importantly by our employees.

Encore's annual retention rate for our call center employees across the globe is greater than 70%, which allows us to deliver a higher level of service to our consumers and ensure our that our Consumer Bill of Rights remains at the forefront of every consumer interaction.

Finally as you may be aware the Federal Trade Commission recently issued a comprehensive study of our industry. We are pleased that the report highlighted the positive role that our industry plays in helping that consumers have access to affordable credit. With that, I will turn it over to Paul who will discuss our financial results in detail.

Thank you Brandon. As Brandon discussed we had a very strong fourth quarter and year in 2012. Collections in the fourth quarter reached a record high for a fourth quarter and continued investments in our operating platform give us confidence in our ability to expand upon the operating leverage created over the past few years. We generated earnings from continuing operations of $0.79 per fully diluted share during the quarter an increase of 17% over the fourth quarter of 2011.

For 2012 we generated earnings from continuing operations of $3.04 per fully diluted share an increase of 29% over 2011. Adjusted EBITDA, which represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $135 million in the fourth quarter an increase of 28% compared to the fourth quarter of 2011. Our overall cost-to-collect for the year decreased 180 basis points to 40.4%, down significantly from 42.2% in 2011.

We achieved these result in 2012 even as we made investments to expand our Internal Legal channel and ramp up our operation center in Costa Rica. While cost-to-collect is an important metric, there are other related drivers of success. One example is generating the greatest net return for dollar invested. We accomplished that by generating more gross dollars collected per investment dollar at what we believe to be the lowest cost per dollar collected in the industry. Overtime we expect our cost-to-collect to continually improve, but also expect it to fluctuate from quarter-to-quarter based on seasonality, the cost of investments and new operating initiatives and the ongoing management of the changing regulatory and legislative environment.

Due primarily to the large purchasing volume and the strong performance of portfolios purchased over the last couple of years our Estimated Remaining Collections, or ERC, at December 31st increased by about $390 million over 2011 to approximately $2 billion. As we have discussed previously we believe our ERC, which reflects the estimated remaining value of our existing portfolios is conservatively stated because of our cautious approach to setting initial curbs and our practice of only increasing future expectations after a sustained period of over performance.

Fourth quarter collections were very strong at $230 million up 24% from the fourth quarter of 2011. Our call centers contributed 45% of total collections or $104 million compared to $80 million. Direct cost per dollar collected in our call centers fell slightly to 7.2% in the fourth quarter from 7.3%. Legal channel collections grew to $113 million in the fourth quarter 2012 compared to $96 million and accounted 49% of total collections. Cost-to-collect in the legal channel was 40.4% down from 41.4%.

I would like to reiterate that our long stated preference is to work with our consumers to negotiate a mutually acceptable payment plan tailored to their personal financial situation. These plans almost always involve substantial discounts from what is owed. We not only believe this is the right thing to do for our consumers, but the right thing to do for our business. When we do litigate, we have pledged to be fair and reasonable throughout the process. Unfortunately, despite sincere efforts to reach consumers in a variety of ways too many refuse engagement with us to resolve their financial obligations. Accordingly and as a last resort we are often left only with the option of using legal means to recover debts that are owed.

Finally 6% of collections came from third-party collection agencies. In general we expect collection from this channel to continue to decline as we shift more of our work to our internal call centers at a lower overall cost-to-collect. As a result of the large portfolio purchase we completed in the second quarter we saw a temporary increase in third party collections as many of those assets were already placed with third party agencies at the time of acquisition. Because of our lower cost-to-collect and because we are able to ensure a consistently positive consumer experience we will continue to shift much of this work to our internal call centers. Consistent with our stated practice and keeping with Consumer Bill of Rights we had no portfolio sales in the quarter.

Moving on revenue from receivable portfolios was $140 million an increase of 20% over the $116 million in the fourth quarter 2011. As a percentage of collection and excluding the effects of allowances our revenue recognition rate was 59.4% compared to 64.1% in the fourth quarter 2011. Our revenue recognition rate is attributable to our cautious approach when setting initial IRRs and our policy of increasing them gradually after periods of over performance. For example as result of sustained over performance we have slowly increased the multiples on the 2009, 2010, and 2011 vintages to 2.9 times, 2.8 times and 2.4 times respectively up from their initial levels of 2.4 times, 2.2 times and 2.0 times respectively.

For the quarter we had $2.7 million in net allowance reversals compared to $2.7 million of allowance charges in the fourth quarter 2011. Looking at the breakdown by year we had $914,000 of allowance reversals in the 2005 vintage, $252,000 in the 2007 vintage, $2 million in the 2008 vintage and $759,000 in ZBA allowance reversals. These were partially offset by allowances of $1.3 million in the 2006 vintage. We had no allowance charges for the 2009, 2010, 2011 or 2012 vintages as had been the case since we acquired these portfolio.

As many of you know we account for the business on a quarterly pool basis rather than overall. 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 accounting treatment lead inevitably to non cash allowance charges in certain periods even when we are over performing a pools original expectation. 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 pools yield.

Unlike allowance charges, which are realized immediately, this increased yield will be reflected as increased revenue during the current and future quarters. Consistent with this practice and as a result of continued over performance primarily in the 2009, 2010 and 2011 vintages we increased yields in those pool groups this quarter.

Shifting now to expenses. Our total operating expenses for the fourth quarter excluding Propel were $102 million up from $84 million in the fourth quarter 2011. Included in operating expenses for the fourth quarter 2012 were stock based compensation charges of approximately $2.1 million compared to $1.7 million in the fourth quarter of 2011. One of our key financing milestones at Encore in 2012 was the issuance of $115 million in convertible debt for a five year term with a 3% coupon. This additional capital will allow us to take advantage of accelerating industry consolidation and keep our competitive cost of capital edge.

However it is important to mention that while the accounting for our business is complicated the accounting for convertible bonds can be even more complicated. We have a 3% coupon on our convertible debt which reflects the cash cost of this debt. However in our financial statements we will show an interest rate of 6% or the amount that is estimated to be our cost of straight debt.

The non cash difference is not insignificant about $3.5 million or $0.09 per share per year. This difference is a non cash charge, so going forward to give a more accurate picture of the cash position of our business we will add the presentation of cash EPS to back out these non cash charges. Earlier today we posted a presentation to the Investor section of our website to more fully explain some of the accounting nuances of our convertible bonds. Including the convertible debt we ended the quarter with $706 million in total debt. Our leverage ratio was 1.25 times in the fourth quarter down from a high of 1.46 times in the second quarter. At the end of the fourth quarter we had approximately $190 million of available borrowing capacity.

Before we open the line for your questions, Brandon has a few final remarks.

Looking back at 2012 it is clear that our team has a lot to be proud of. We posted strong financial and operational results, made key investments to designed to drive performance in the coming years and funded an initiative that should help our consumers get back on the path toward financial freedom. Our strength in analytics and disciplined approach to deploying capital continue to be competitive advantages for the Company. Advantage that are increasingly important at a time of industry consolidation and elevated pricing.

Finally our strong capital foundation and creative responsible approach to problem solving position us well for 2013 and beyond. We would like to close by once again thanking Encore's employees world wide for their continued commitment to our success. I am gratified by the work that we do to help consumers resolve their outstanding debts flexibly and affordable. With that, we will open up the call to questions.

Thank you. (Operator Instructions). The first question is from David Scharf of JMP Securities. Your line is open.

Good afternoon, thanks for taking my questions. Brandon, first off just a general macro question. Can you provide any commentary whether or not know that we are six weeks in to the new year whether you are noticing any improvements in the overall liquidation environment for consumers, and in particular whether these first few weeks you have been able to discern whether the payroll tax increase has had any impact on collections?

Dave, we have often said that we do not think that our collectors are impacted all that much by the macro economy. If you go back through the data we have presented over the last few years, payment behavior has been largely consistent. So I have not taken a look at it specifically in the first six weeks, but I can tell you it is unlikely to be any material shift in collections related to seasonality or anything else that would impact our consumers. We are seeing performance in line with our expectations.

Got it. Shifting to the purchasing in the quarter. How should we think about the Chapter 13 paper? Is this a one off unique opportunity, or is this an assets class you feel you have a lot more capacity down the road to service?

I think it is both. It is an assets class we have talked about the last few years, and we have often said that we would not invest in it unless we found the right opportunity. We think looking at performing pools is a better investment than when you are buying them just being filed. We have a very large portfolio of bankruptcy that we manage for our own accounts and we have bought a meaningful amount over the last few years. We think it is an assets class you will see some more buying this year, but this particular deal is an opportunistic one and one we expect to see in companies like the one we worked with where people struggle with the financing and the liquidation environment and companies like Encore can take advantage of it.

Okay. Did I hear you say these are primarily performing BKs?

They are.

Okay. And does the expectation of yield did that color any of the change in the monthly IRR? at the end of the year it looked like it was down on the 2012 vintages from what we saw at the end of December.

I think what you continue to see is as we put new portfolio on we continue to be conservative and you likely just saw that impact.

Got it. And just one last question and I will get back in queue. You put a lot of capital to use obviously in the quarter so did one of your obviously public competitor yet your commentary on elevated pricing seemed to be as cautious as it was in the Q3 call. Can you give us a little backdrop on whether anything on the supply landscape has change in the new year in terms of either more players consolidated and liquidating or whether any sellers have reentered the market?

Well, on the supply front we see a continued series of discussion with other competitors generally the smaller midsize competitors who are struggling and that has continued now for a while. Our commentary is really around the auction environment directly from the issuers, which the issuer which is very competitive especially probably highest in the fresh space. But across all the different stage of delinquency we are seeing increased pricing. We have not seen much change in or out of supply as it relates to the issuers. We just think there are at times people who are over spending themselves to some extent and likely will find themselves in trouble at some point in the future.

Got it. Thanks.

Thank you. The next question is from Hugh Miller of Sidoti & Company. Your line is open.

I had a question about the tax return season. I realize that it is starting a little later than normal this year and that is a significant source of your cash collection in the quarter. DO you anticipate that is going to have any meaningful influence 1Q collections or is it likely to be caught back up throughout the remainder of the quarter?

We are not expecting to see a material difference as a result of the delay.

Okay. Looking at the regulatory environment given the recent ruling about recess appointments. Can you talk about the regulatory landscape and how you think that influences things with the CFPB and your competitors and whether or not they are still going to look to exit the business?

Well, we have for the past few years continued to expect the CFPB to make their way around the collection industry in 2013. It is my belief that nothing has changed in that respect. So that presence will be there. We think that others will look to that presence and it will be one of the factors they will use to make a decision to be in the business. I think the driving force besides the regulatory environment is just the ability to get attractively priced capital and then collect at a rate you need to be profitability with a lower operating cost. The regulatory environment is sort of the straw that breaks the camel's back, but ultimately these companies in the space are struggling financially and that is the bigger issue.

Okay. Good color there. I was just looking at the legal channel cost-to-collect. It looked like it trended up in the second half of the year relative to the first. And was wondering if you could provide any insight as to what might be driving that and how we should be thinking about that as we head into 2013?

The overall cost-to-collect in the legal channel, Hugh, is going to be dependent on the volume of cases that are filed in any given period and that can fluctuate from quarter-to-quarter. So the variable cost associated with the legal channel has been consistent throughout the year, but depending upon the timing and volume of accounts placed in that channel it can shift from quarter-to-quarter, so it is really just a quarterly timing thing. It does not change the overall cost-to-collect of that business.

Got you. Okay. Can you remind us again about when the tax lien list should be coming out for the Propel business Texas?

The counties start producing them as we speak between now and the end of February we should receive all the county delinquent tax roles.

Okay. Are you getting any insight now as to how things are looking relative to your expectations when you acquired the business from a capital allocation standpoint?

Sitting here today we thought we bought it exactly was going to happen this year. 2013 was always going to be the year where our innovations and partnership would drive results and we think we are really well positioned to get that done that obviously remains to be seen, but there is nothing to suggest we will not have a big first half of the year.

Okay. Thank you.

The next question is from Mark Hughes of SunTrust. Your line is open.

Thank you very much. Brandon, what did you think of that FTC report? You mentioned it in your prepared remarks, but any further thoughts about that whether you thought it was good, bad, what do you think.

I felt like it was balanced. For once we got a report that I think looked that totality of the industry, and they took obviously a long time to draw some conclusions, but I think it highlights that back in 2008 they gathered some data that suggests there are changes that need to be made in the industry. Of course, I do not think a lot of them have the contracts that are signed today, the access to documentation are really night and day for 2008 till today. Does that mean that the industry cannot get better, no of course we can get better. But I think on balance it felt like a fair representation of the industry. And like I said in the remarks I think their acknowledgment that we play a vital part in the credit cycle is an important piece of that.

What did you think about their point about too many people being targeted erroneously? Did you think their numbers were on the mark?

The problem is we cannot see all the data. I can tell you is that does not happen here. There are very few instances where we end up contacting the wrong person. The banks have gotten really good at working through issues of identity theft or issues of mistaken identity and rarely do we get information where we are not actually contacting the person who owes the debt.

How about on the tax lien business any new legislative initiatives that are worth talking about?

There is a lot going on, but none that I would bring up at this point.

The trend in pricing between 3Q and 4Q you say pricing continues to be elevated. Did it move up during 4Q?

It did.

And would you like to characterize, throw an adjective at that?

The problem with the adjective it did not spike up, but it continued to trend up. I would use that word. The drifting upward continues to happen,but there was not some step function change.

Thank you.

Thank you.

Thank you. The next question is from Samir Gokhale of Janney Capital. Your line is open.

Hi, thanks for taking my questions. The first question was in terms of Propel, I think last quarter you said it was $1.4 million of net income. I haven't dug through the 10-K, but just from what I could see it seemed like it was below that. Am I looking at the right numbers in terms of the comparisons. What was the comparable number to the $1.4 million from Q3 what was that in Q4 ?

In Q3 it contributed about $0.06, in Q4 it contributed about $0.05. That is typical of seasonality of the business. The portfolio grows early on in the year and then reduces later in the year with principal payments, so that is just part of the typical seasonality of the business.

Okay. I just wanted to make sure I was looking at the right stuff. Okay. In terms of the other operating expenses, I do not know if you addressed this maybe I missed it, but the sequential decline in other OpEx what was that attributable also seasonality or was there something else going on there going there? Going from (Inaudible). to $10.1 million.

A lot of that has to do with what is purchased in the quarter. In other operating expenses are things like mail campaigns and those types of costs, so depending on where we are at different points in time during the year it will have an impact on the level of operating expenses in any quarter. So that is largely what is driving it the impact of volume of purchases and what we are doing in one period versus another.

Okay. And then in the fourth quarter did you say your total purchases what percentage of that was made up of BK purchases?

So in the fourth quarter $83.5 million was BK.

That is bankruptcy. Okay. Terrific, that is helpful. The other question i]was you have been expecting this consolidation to happen in the industry and that has been our thesis as well. But the companies that are selling their portfolios, there was one in Q2, but as you talk to other folks who are also selling you portfolios are you are hearing about things are these companies that are just shutting up shop and moving on to some other business, or are they just temporarily waiting for the pricing environment to improve and then at some point if prices come down then they step back in? How would you characterize that from the stand point of competitive environment?

Some of that is unknown. Our belief is the wind down is permanent, but that does not mean if pricing change people will not come back in. But we are not expecting them to come back in the near term.

Okay. The guys that have sold you their portfolio or others you have heard about are those specific instances where the companies have just shutdown completely, or are those instances where people have just temporarily sold the portfolio, got the cash and then will revisit maybe at some point?

Probably a little bit of both.

Okay. Okay. And then just my last question on the convertible bonds, Paul, can you remind us you talked a little bit about the non cash impact on the earnings and the presentation you will provide going forward in a revised format. So the debt is accounted for at a discount to par; is that right? And as excretion occurs that excretion is the additional interest expense partially that flows through the income statement, is that the way to think about it?

That is exactly right.

Okay. How much was your discount on your balance sheet on the debt?

It is about $14 million or so.

Okay.

There is a presentation that we filed today which walks through all the mechanics and shows the discount and how the discount was calculated and how the excretion will work by year over time. All the numbers that you and others will need for your modeling we put out in the presentation today.

Okay. Got it. That is all I had. Thank you.

(Operator Instructions). Bob Napoli of William Blair. Your line is open.

Good afternoon, Brandon and Paul. Thank you for taking the question. Question first of all on the productivity and outlook for productivity improvement. You have been able to drive down your costs pretty substantially over the past few years. How much left is there? Is it getting much more difficult to get further reductions or improvements? Out of India you have done a great job there with that. Are you seeing incremental most of the way through those improvements the cost reduction or is there still a lot more to get?

There is a lot more to get. Part of the improvement that happened in 2012 were offset by investments we made. We actually had further reduction in operating cost-to-collect but that was offset by those management and regulatory environment both legal expenses and settlement but also the investment in Costa Rica and building up our compliance infrastructure in anticipation of a CFPB. So in our cost-to-collect you have a lot of new dollars coming in and lot of savings so net to a decrease. All that said, I would not expect there to be a huge change on our cost-to-collect in the next year or so. I think you will see the same trend ; more collection at a lower cost but offset by investments we need to make to put in place everything that we think needs to be in place in the new regulatory environment.

Has the CFPB, and I apologize if you said this I missed some of your opening comments. Do you have your audit schedule with the CFPB?

If we did, I am not sure I could tell you. But what I would say we expect that they are going to show up at some point this year.

Okay. All right. Then as far as the competitive environment and gradually higher pricing have you seen a reduction in the number of sellers or much a reduction in the number of competitors, buyers?

What we have seen is some of the sellers have proactively combed their list of people they will sell to. There may be people out there that still have capital that do not have access to buy portfolios. We have seen a huge increase in the number of audits we have had to go through as Company. The banks have taken very seriously the third party oversight mandate by the CFPB and are going out visiting all the people that they want to do business with. So where there is change that we see is we see the sellers restricting the universe of people that they will sell to.

Okay. But you haven't seen -- I guess there has been a little bit of -- the portfolio, the bankruptcy portfolio, you bought was that essentially a competitor getting out of the business?

It was the inventory of the competitor; that is correct.

Okay. And you also bought competitor earlier in the year.

We think net debt to demand is retreating to some extent but at the same time you have companies like ours and PRA that are expanding their access to credit. I (Inaudible) if the demand is down. I just think the number of people that the sellers will sell to is decreasing.

How about the number of sellers, some big sellers it has been suggested that some big sellers have not come back in to the market after pulling back in the third quarter; is that true? Have you seen pretty much the main sellers come back into the market?

Interestingly over the last couple of years there have always been times where one of the big sellers was not selling for whatever reason. So today there are big sellers that are not selling and a year ago there are big sellers that are not selling. What I will say is I think all of the large banks are being very cautious about what they sell and who they sell it to, which sometimes delays what is going to be in the market place. But anyway, I think there is always a number of sellers who are on the side line for whatever reason. They do not need to sell, they are worried about the regulatory environment we see that pattern constantly.

Okay. And then on your share of buy back should we expect more share buy back at this point or given the fact there could be some consolidation this year would it be more likely you are going to keep your powder dry for potential large opportunities?

Right now we have basically spent what was approved and authorized by the Board to spend, and there is no new buy back that is in place at this point in time. So right now we are focused on capitalizing on the opportunities we see in the market. The Board could authorize at some point in the future, but right now there is no authorization in place.

Okay. Thanks. Last question on the M&A front, are you actively looking at M&A opportunities? Do you have interest besides the U.S. do you have interest Internationally, increasing interest? I know you have always had interest.

We have been in a continual dialog with opportunities outside the U.S. that continues today as it has been for the last period of time. We believe it is a necessary part of our diversification path, but we are going to wait for the right thing to come up at the right time. But there are active discussions going on all the time.

And domestically? Propel was a diversification effort ,are you looking at other diversification?

We are.

Okay. Thank you.

Thanks, Bob.

Thank you the next question is from Samir Gokhale of Janney Capital. Your line is open.

I just had a follow-up actually on cloud computing and your investments in the cloud infrastructure. I read something that was saying you want to support self service customer website and have better analytics. It seems like the person in charge of that has been given a budget of around $25 million or so in that business. What are your expectations from that? It sound like it is in the very early stages of your work there, but is that expected to result in some real productivity improvements or is that do you think incremental? How should we think about that?

On one hand we hired an incredibly talented CIO, who managed to get the first positive article on a debt collector in the Wall Street Journal, so I give him a lot of credit for that. That being said, I think it is our belief that we are increasingly in an age where consumers want to conduct their business in an online fashion or not have to go through the collection process of going through a phone call with somebody.

The functionality to do that requires a significant investment, but what we believe will happen overtime is a reduction in cost-to-collect as the dollars collected through that channel will cost us other than the investment in technology zero. So it is one of the ways to Bob's question earlier that we think we can meaningful impact the cost structure, but we are in the early innings of that so I would not start banking that in. But we are spending a lot of time thinking about it and designing the infrastructure for the future.

And the $25 million, Samir, relates to all of IT spending across the organization not to this initiative.

Okay. Great. Thank you.

There are no further questions in queue at this time. I will turn call back over to management for closing remarks.

Thank you very much. We appreciate your time tonight.

Ladies and gentlemen, this conclude today's program. You may now disconnect. Good day.