Encore Capital Group Inc (ECPG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Second Quarter 2013 Earnings Conference Call. (Operator Instructions)

I would now like to introduce your host for today's Conference Call, Mr. Adam Sragovicz. You may begin.

Thank you, Kevin.

Good afternoon, and welcome to Encore Capital Group's Second Quarter 2013 Earnings Call. With me on the call today are Ken Vecchione, our President and Chief Executive Officer; and Paul Grinberg, our Executive Vice President and Chief Financial Officer. Ken 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 second quarter of 2013 and the second quarter of 2012.

Today's discussion will include forward-looking statements subject to risks and uncertainties. Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risk.

During this call, we will use rounding and abbreviations for the sake of brevity. We will be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our Earnings Release, which was filed on Form 8-K earlier today.

As a reminder, this Conference Call will also be made available for replay on the Investor section of our website, where we will also post our prepared remarks following the conclusion of this call.

With that, let me turn the call over to Ken Vecchione, our President and Chief Executive Officer.

Thank you, Adam. And good afternoon, everyone. I appreciate you joining us for our discussion of Encore's second quarter results today.

Once again, with our deliberate and disciplined approach to portfolio underwriting and management, we delivered strong performance across all the key financial metrics by which we manage our business. Excluding one-time expenses and convertible noncash interest, our earnings for the quarter were $0.85 per share. Paul will review the one-time expenses in more detail in his presentation.

Cash collections increased 16%, to $278 million. Even though we deliberately slowed down our purchasing volumes in the first and second quarters in anticipation of the Asset Acceptance acquisition, our continued ability to identify and engage those consumers with the greatest likelihood of recovery enable us to drive strong growth in collections.

Our adjusted EBITDA was $177 million in the second quarter, an increase of 20%. Our overall cost to collect decreased seven basis points, to 38.8%. This reflects savings achieved in various operational strategies, which were partially offset by investments in our internal legal initiatives and additional spending required to proactively manage the changing regulatory and legislative environment in which we operate.

With the acquisition of Asset Acceptance and the strong performance of our portfolios purchased over the last few years, our estimated remaining collections, or ERC, at June 30th increased by $760 million, to approximately $2.7 billion. In addition to achieving these strong financial results, we also made several key strategic moves which will provide us with long-term advantages and further strengthen our industry-leading debt purchasing and recovery platform. I'll highlight these strategic moves now and will go into more detail later in the presentation.

We closed the acquisition of Asset Acceptance in June, largely satisfying our purchasing goals for the year and providing us with a better return than we would have achieved buying portfolios on the open market. We announced the acquisition of a controlling interest in Cabot Credit Management. This represents a major milestone for Encore, as we entered the UK debt buying and recovery market for the first time through a leading player with a long track record of steady growth.

We also completed the placement of $150 million of seven-year convertible notes at a cash coupon of 3%. This provides us with long-term financing at attractive rates. An additional $22.5 million of underwriters' overallotment was also exercised, demonstrating our ability to access the financial markets and the market (inaudible) of our strategy and approach.

Turning to capital deployment -- we had a strong quarter in our core business, driven primarily by the $381 million allocated to the Asset Acceptance portfolio. Paul will discuss the allocation of the Asset purchase price in more detail. We also deployed $50 million in capital for Propel, which I will discuss in more detail shortly.

Although Asset Acceptance will make up a significant portion of our purchasing volume for the year, there are other catalysts and drivers for opportunities in the core business that we are tracking closely. First, on the demand side, we're seeing smaller competitors being driven out of the market because of the high cost to operate, particularly as the regulatory environment grows more complex and credit issuers become more selective about whom they will sell to.

On the supply side, we expect a number of issuers to complete their debt buyer audits and return to the market by the end of this year or the beginning of next. Issuers are also starting to lend again, which we will expect to lead to higher levels of delinquencies and charge-offs in the future.

Our strong capital deployment in the quarter, particularly our acquisition of Asset Acceptance, led to significant growth in our estimated remaining collections, bringing it to $2.7 billion. Our ERC has grown over 40% from the first quarter of this year. We expect ERC to continue to grow in Q3 as a result of the acquisition of Cabot. In fact, we expect Encore's ERC to increase to more than $3.3 billion after deducting ERC attributable to the minority interest.

As you may recall from our Investor Day, our strategic goals for expansion have long included growing our core business, expanding into new asset classes and expanding into new geographies. As the next few slides will show, we are successfully executing along all three of these dimensions.

Asset Acceptance represents our latest move as a leader in the consolidation of our industry, and the integration is proceeding on schedule. For the past few months, teams at Asset Acceptance and Encore have worked closely to develop a comprehensive strategy to combine our operations.

With that plan largely complete, we are now moving into the implementation phase. We have moved nearly 400,000 accounts from Asset to Encore and are consolidating certain support functions to drive efficiencies. All major project areas are proceeding as planned. This is a complex transaction, but we have a strong track record of buying portfolios from competitors and integrating them into our efficient and low-cost platforms. I want to thank the people of Encore and Asset Acceptance who continue to put a significant amount of time and effort to ensure a successful outcome.

Propel, which represents our expansion into secured assets, continues to grow and contribute to Encore. Not only did our capital deployment grow significantly this quarter, to $60 million from $27 million last quarter; we deployed a significant amount of capital [deploying] tax lien certificates in four different states. It is important to keep in mind that the $60 million that we deployed at Propel come from separate credit facilities and did not take away from our ability to access capital in our core business. We view the tax lien business as a low-risk complement to our core receivable business and are pleased how we've been able to build these separate pools of capital and earnings streams to support our overall growth.

We saw revenue growth over the last quarter. And as we continue to grow Propel's book, we expect the revenue growth to continue. Operating income was lower in the second quarter due to seasonality, as we incur significant marketing costs to originate tax lien transfers. We expect the cost to be lower in the third quarter, which, combined with our deployment of capital in the second quarter, should result in higher operating income.

We also completed the acquisition of the controlling stake in the UK-based Cabot Credit Management. This acquisition, which would be immediately accretive, will enable us to deploy capital in the largest debt purchase market outside the US and leverage the expertise and infrastructure we've built here at Encore. Our senior teams have already begun to work together to begin realizing the synergies between the two businesses. Our initial focus will be on how Cabot expands into the large secondary, tertiary, and lower-balance segments of the UK market by leveraging our deep analytical knowledge of these assets and utilizing our workforce in India during the day when this site is dormant.

Cabot's decision science and analytics teams were in San Diego a few weeks ago beginning this process. And Paul [Monoriki], the head of our Indian operations, and I were in London last week setting the stage for our integration activities. Although we are still very early in the relationship, I am pleased to report that our initial assessment of purchasing bonds in the UK continues to look attractive. And Cabot's ERC just passed GBP1 billion. It is worth mentioning that Cabot also exhibits seasonality in purchasing with Encore, with a light Q3 and a strong Q4.

On the regulatory [functions] (inaudible) leasing developments is the OCC and the [CFTD]. The OCC provided guidance for creditors who develop their relationship as perceptive debt buyers. By doing so, the agency has solidified the framework under which (inaudible) will sell receivables. Likewise, the CFTD provided a bulletin advising of its overfunded debt collection practices to include original issuers. In addition to benefitting the consumer, we believe these agencies' guidelines encourage creditors to engage in debt collection to provide robust information to consumers about their obligations, which is an important element of responsible debt collection. We believe these two agencies' guidelines favor large debt buyers with extensive consumer services in compliance efforts such as Encore.

As an aside, during the quarter, Encore saw a number of routine audits by leading credit issuers. This has deepened our existing relationship with these issuers and, we believe, highlighted our industry-leading practices. All these developments confirm a belief that the industry consolidation we have seen to date will continue. And we believe that Encore will continue to play a leading role in that process. In this active regulatory environment, Encore will continue to engage with regulators to raise industry standards and promote responsible debt collection, which is at the forefront of everything we do.

Before handing it over to Paul, I'd like to take a moment to revisit the value creation model that we talked about during our Investment Day. This is our view of how we create top-quartile shareholder returns -- the foundation of our management team, the ability of the organization to learn and adapt, and the integrity, which we call principal intent; with which we operate.

Pillar one is superior analytics. And those of you who have followed us for some time know that this is a key differentiator for us. Our focus on the individual consumer, not a portfolio, is why we're able to collect more dollars more efficiently. This is one of the key factors that enables us to buy large portfolios from competitors such as Asset Acceptance and achieve higher levels of success than were attained previously.

Pillar two is operational scale and cost leadership. This is one of the driving principles behind many of our business decisions. And you can see it in the significant reduction in the cost to collect that we've experienced over the last few years. This reduction has been the result of many things, some of which include specialization in our call centers, our investment in international operations that are lower-cost, and our investment in our internal legal platforms. These are some of the reasons that we're able to reduce our costs to collect [seven] basis points year-over-year, and they will be the drivers of future cost increases going forward.

Pillar three is strong capital stewardship. We are committed to deploying our capital [prudence] at returns in excess of our weighted average cost of capital and to the balance of the risk-reward equation of any portfolio or business we purchase. In addition, we believe our ability to raise low-cost capital will enable us to continue to grow our business, achieve the growth positives we've highlighted, and create long-term value.

Finally, the fourth pillar is our extendable business model, which creates scale for us. As I said earlier, the long-term growth of our business will include growing our core business, expanding into new asset classes, and expanding into new geographies. We are executing along all these dimensions now, and we continue to look for growth opportunities that leverage the first three pillars.

When you put all these pillars together, we drive strong financial results in terms of growth, margin expansion, free cash flow and [keeping] multiple expansion. These are critical to achieving top-quartile shareholder returns, which we are defining as long-term annual EPS growth of 15% or greater.

Finally, I would like to recognize and thank Encore's more than 3,500 people for a fantastic quarter. The foundation of our value creation model rests on the shoulders of the people of Encore. Our results are a direct reflection of their collective efforts, and I appreciate their dedication and hard work.

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

Thank you, Ken.

As Ken discussed, we had a very strong second quarter, even following the deliberate lower purchasing volumes in Q1 and Q2. As we go through the numbers in more detail, I think you'll get an appreciation for how effectively and efficiently we operate our business.

Purchases in the quarter were $423 million, including $381 million allocated to the portfolio we acquired as part of the Asset acquisition. These purchases led to strong growth in ERC, which stood at more than $2.7 billion at the end of the quarter. Taking into account the Cabot transaction, our ERC is expected to exceed $3.3 billion after deducting the ERC attributable to the minority interest.

We believe that our ERC, which reflects the estimated remaining value of our existing portfolios, 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.

For example, as the result of sustained over-performance, we have slowly increased the multiples on the 2009, '10, '11 and '12 vintages to 3.0, 2.8, 2.5 and 2.0 times respectively, up from their initial levels of 2.4, 2.2, 2.0 and 1.8 times respectively.

The $381 million allocated to investment and receivable portfolios was part of our preliminary allocation of the purchase price for Asset, which was performed in conjunction with a third-party valuation firm. The bulk of the purchase price was largely allocated to Asset's portfolio. When we closed the Asset acquisition, we expected $902 million of future collections from Asset's portfolio, representing a collections multiple of 2.6 times. We also acquired Asset's cash, fixed assets and other assets and assumed certain liabilities largely made up of Asset's deferred tax liabilities. The balance of the purchase price was allocated to goodwill and is primarily attributable to expected synergies when combining Asset with Encore. This purchase price allocation is preliminary and may change after we finalize our valuations.

We collected a record $278 million, including $21 million from the Asset portfolio, up 16%. Our call centers contributed 42% of total collections, or $117 million, compared to $112 million. Legal channel collections grew to $134 million in the second quarter, compared to $115 million, and accounted for 48% of total collections. Finally, 10% of collections came from third-party collection agencies.

Over the long term, we expect collections 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 Asset acquisition, we expect to see a temporary increase in third-party collections, as many of those assets had already been placed with third-party agencies at the time of acquisition.

Because of our lower cost to collect, and because we are better able to ensure consistently positive consumer experience, we will continue to shift much of this work to our internal call centers. Consistent with our stated practice, and in keeping with our Consumer Bill of Rights, we had no portfolio sales in the quarter.

Revenue from receivable portfolios was $152 million, an increase of 10% over the $139 million in the second quarter of 2012. As a percentage of collections and excluding the effects of allowances, our revenue recognition rate was 53%, compared to 57% in 2012. For the quarter, we had $3.7 million in allowance reversals, compared to $1.2 million of reversals in 2012.

Looking at the breakdown by year -- we had $57,000 of allowance reversals in the 2006 vintage, $237,000 in the 2007 vintage, $285,000 in the 2008 vintage, and $3.1 million in [DVA] allowance reversals. We had no allowance charges for the 2009-through-2013 vintages, as has been the case since we acquired these portfolios.

As many of you know, we account for the business on a quarterly pool basis rather than overall. When pools underperform, 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 expectations.

This pool-by-pool accounting treatment leads inevitably to noncash 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 during the current and future quarters. Consistent with this practice, and as a result of continued over-performance primarily in the 2009, '10, '11 and '12 vintages, we increased yields in those (inaudible) this quarter.

Excluding acquisition-related and other one-time costs, our overall cost to collect decreased 70 basis points, to 38.8%. Direct costs per dollar collected in our call centers rose slightly, to 6.1% in the second quarter, versus 6% in 2012. While we continue to improve the efficiency of our call center operations, this quarter we saw the effect of the Asset acquisition from the higher cost to collect in their call centers. As we bring Asset's cost to collect in line with Encore's over the next few quarters, we should see a return to further improvements in our call center cost to collect.

Direct cost per dollar collected in the legal channel was 33.3%, down from 35.7% in 2012. While cost to collect is an important metric, we don't focus on it in isolation. Overall, success in our business is driven by generating the greatest net return per dollar invested. We accomplish 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.

Over time, we expect our cost to collect to continue improving but also expect it to fluctuate from quarter to quarter based on seasonality, the cost of investments in new operating initiatives, and the ongoing management of the changing regulatory and legislative environment.

Our legal channel, which includes both legal outsourcing and our internal legal operations, continues to be a strong contributor to the business, both in terms of dollars collected and cost to collect. Total dollars collected in our legal outsourcing channel was $117 million, at a cost to collect of 34.5%. Total dollars collected in our internal legal channel were $17 million, at a cost to collect of 54.5%.

In 2011, our cost to collect in internal legal was over 200%, as we were investing in our technology platforms, hiring staff and opening new sites. As our volume in this channel increased, our cost to collect came down. Last year, our cost to collect was over [8%], and this year, we expect it to drop even further. Over time, we expect our cost to collect in internal legal to decline to the high teens.

In our 10-Q, which we filed earlier today, we've now broken out our legal cost to collect between our external and internal legal channels. This will provide investors with more visibility to our progress and reducing cost to collect in our internal legal channels.

I'd 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 situations. 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 the right thing to do for our business.

As mentioned earlier, collections reached an all-time high for a 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. This growth in collections and cost improvement led to improved cash flows, with adjusted EBITDA increasing 20% over last year. Adjusted EBITDA, which represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $177 million in the second quarter. This strong cash flow allowed us to acquire Asset Acceptance and fund our portfolio acquisitions during the quarter, while increasing net debt by just under $200 million.

Largely due to the acquisitions of the Asset and Cabot, we saw a number of one-time and noncash items this quarter. We had Asset-related deal costs of $3.6 million and deal costs associated with Cabot of $3.1 million. We also incurred consulting, severance and retention expenses of approximately $5.4 million. Some of these costs will continue in Q3 and Q4, although at much lower levels.

We also incurred $3.6 million of costs hedging the Cabot purchase price. Since the Cabot purchase price was denominated in pounds, we couldn't place a collar to protect ourselves from any negative movement of the pound against the dollar. The pound actually weakened after we put the collar in place, resulting in an accounting charge. But the weaker pound resulted in a lower dollar price for Cabot, largely offsetting this charge.

Finally, we incurred $900,000 in noncash interest on the convertible notes. The total for all of these items was approximately $17 million or $0.41 per share after tax. Without these one-time expenses, adjusted income from continuing operations increased to $0.85 per fully diluted share during the quarter.

Earlier this year, we realized that with the Asset and Cabot transactions and the timing of purchases during 2013, it would be difficult for investors to model our business this year. As a result, while we typically do not provide earnings guidance, we provided guidance for 2013 of $3.50 to $3.60 per share.

Taking into account the Asset acquisition, the Cabot acquisition which closed earlier in the quarter than initially expected, and the increased yields at our 2009 through 2012 vintages due to their strong performance, we now expect 2013 earnings will comfortably exceed the upper end of that range. This strong performance is the direct result of the value creation model that we shared with you in detail at our Investor Day in June. Consistent with our past practice, we do not plan on providing updates to this guidance, other than to reiterate that our goal is to continue to generate long-term earnings growth of [15%] or more.

We also completed the placement of $150 million of seven-year convertible notes and a cash coupon of 3%. This provides us with long-term financing at attractive rates. After the quarter, the underwriters exercised their overallotment options, placing an additional $22.5 million of convertible notes.

These notes were very well received by the market. We priced to convert at the low end of this coupon range and at the high end of the conversion range and were still able to upsize the deal from the $110 million transaction that we initially marketed. The convertible notes can be paid in cash, stock, or a combination of the two, at Encore's options.

We also entered into a capped call transaction, which increased the economic conversion price up to $61.55 per share. Since the bondholders have the right to convert at $45.72, there will be accounting dilution above that level, but no new shares will be issued by Encore unless the stock reaches $61.55 per share. The strong execution of the convert and the favorable terms demonstrate Encore's ability to access the financial markets and the market support of our strategy and approach.

While our total debt has increased from the previous quarter, so has our ERC. When taking into account collection costs and taxes, we are $1.9 times collateralized on our debt.

During the quarter, we amended our revolving credit facility twice to keep pace with our growth. The first amendment allowed for the Asset acquisition and increased the total facilities to $975 million, with a replenished accordion which now sits at $152.5 million. We also made provisions allowing Propel to raise additional capital to grow its tax lien certificate business, which it did through a new $100 million tax lien certificate facility. Finally, we increased the subordinated debt basket to allow for our convertible debt issue.

The second amendment allowed for the Cabot acquisition. Our capital position remains strong, with over $230 million available as of today for borrowing, and the ability to add another $162.5 million from our accordion. With respect to the covenants in our credit facility, we estimate that we could borrow over $500 million in addition to our current debt and still be within compliance. At Propel, with the accordion, we currently have more than $125 million of available capital deployed for tax lien transfers and certificates.

Earlier this week, Cabot raised an additional GBP100 million through an offering of senior secured notes. The bonds have a rate of eight and three eighths percent in the seven-year term.

As Ken mentioned, one of the immediate opportunities we'll be focusing on is the expansion into the secondary, tertiary and lower-balance segments of the UK market. This capital, which we've raised on favorable terms, will enable us to expand our purchasing into these new market segments.

In summary -- Encore once again delivered a strong quarter across all key metrics by which we measure our business. Our capital deployment was strong. And while we expect lighter purchasing in the third quarter as we absorb the Asset portfolio, we expect a more normalized fourth quarter. We have excellent liquidity in assets and low-cost capital, so we are poised to take advantage of market opportunities as they arise. Our $2.7 billion in ERC, combined with our focus on operational executions, build the base for continued strong cash collections.

We remain focused on driving efficiencies across the business, including Asset. With the acquisition of Asset and Cabot, we are well positioned to continue the 15%-plus long-term earnings growth we shared with you at our Investor Day in June.

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

(Operator Instructions) David Scharf, JMP Securities.

Busy quarter. A lot of moving pieces here.

Paul, I wonder if you can start with just helping us maybe understand the trajectory a little better in the second half on the integration of Asset Acceptance, maybe starting with how we ought to be thinking about how much collections are still going to be coming from third-party collection agencies. How quickly does that kind of wind down?

It'll be relatively consistent with a three- to four-quarter guideline we gave you as it relates to the costs. If you remember, we did a large purchase from one of our competitors in the second quarter of last year. And it took about three to four quarters before we had migrated the bulk of those accounts to our platform. So it'll be along the same timeframe.

Okay.

And along the same line, as we kind of look at the level of salary and employee costs in the quarter, obviously it didn't reflect the full three-month contribution of Asset Acceptance. But it's sort of a starting point, that roughly $32 million, $33 million. As you kind of integrate further, is that number excluding -- obviously, we've got Cabot to roll in as well. But just trying to get a sense for how to think about that figure going forward.

Yes. So we had the Asset close on June 13th, so we expect to get a little more of half a month of their costs. And I think that we will have the full burden of those for the third quarter. But we will reduce those costs over time. And again, I think that you'll see a blend of Asset's cost to collect and Encore's cost to collect in the sites for a period of time. But after three or four quarters, we should be down to our cost to collect, in general.

Okay.

But don't forget, in that $32 million was $3 million of one-time charges, too.

Okay, and it's a GAAP figure. Perfect.

And it looked like there was still not an insignificant amount of purchasing in the quarter, excluding the [OCC] allocation -- $40-odd million. Was that just a result of forward flow commitments that you had to commit to? Or should we still have a little bit to model in for the third quarter, even though you've kind of talked about taking a step back still?

Yes. Some of that was forward flow, some of that was forward flow from Asset Acceptance. Some of that was portfolios that we won. And we won them at what we considered to be attractive IRRs. So I would expect Q3 to be maybe equal to, or maybe a little bit higher, than Q2 in terms of the organic growth of deployment. And then in Q4, I would expect us to be at a normal run rate, as (multiple speakers) --

Got it.

-- into the market.

Okay.

And then lastly -- and then I'll get back in queue -- just big picture, kind of state of the market -- I was reading the language in the Q regarding supply and pricing. And it seemed to be very status quo-oriented, in so many words saying don't expect the supply and pricing environments to improve anytime soon. Your prepared remarks, however, kind of noted that smaller competitors seem to be, for a variety of reasons, stepping back, exiting the business, when you have a couple large sellers entering the market. Just trying to kind of balance those two and get a more up-to-date line of thinking in terms of whether we think, come January, this is a materially improved pricing environment.

Fair enough.

So maybe taking a half a step back and looking at these holistically -- we have seen the smaller players exit the market. And they're exiting for a variety of reasons. Some of it could be financing, some of it could be shrinking margins, because of the cost to compete; i.e., cost of regulations increasing. But still, the lion's share of the market is in three player's hands. And the top five players own about 85% of that market.

The supply for the second quarter was down somewhat. And that's obvious, because some of the large national players are currently off the market as they retool and reenergize or reengineer their debt sales process to meet the new regulatory expectations of the CFTD and the OCC.

So, what we have seen, though, in terms of pricing -- it remains competitive. But different parts of the market are demonstrating slightly different characteristics. So the [fresh] and the [DK] market needs to kick up somewhat, and the later-stage paper -- we have seen a beginning of the flattening of rising prices. I think as we go forward, we think there'll be one lost player coming back in Q4; we hope the other players will come back into the early part of the year. And we'll see what happens with pricing at that time.

For us, Asset Acceptance will have been mostly digested. We did 400,000 accounts, as I noted, converted. That was almost 100,000 more than we anticipated, so that conversion's going on track. And as we enter the fourth quarter, we're going to have the capacity to put more accounts, and therefore deploy more dollars, out there, so we can build our pipeline and build the accounts for our account managers.

Got it, thank you. I'll get back in line.

Bob Napoli, William Blair.

Paul, you must be having a lot of fun with all the accounting on these acquisitions. You have another one coming.

That one will be even more fun.

Just have a question on the OCC paper -- they do say one thing to consider there is -- if you have international collections, they don't just say -- they don't say you shouldn't sell to somebody who collects internationally, but it says that it's a consideration. With the Asset Acceptance acquisition, do you -- I'm not sure if you're going to be building over the long run -- but you want to have a bigger presence of US collections for those sellers, and are there sellers that will not sell if you are collecting outside of the US? And what do you think is the purpose behind that? Is it the ability to monitor compliance outside the US?

Okay, so four or five questions in there. Let me see if I can remember them in reverse order.

Yes, I think what's driving is making sure that the OCC is encouraging the banks, the issuers, to be able to have a firsthand inspection being onsite. So I think that's sort of where they're going. And the compliance would be easier, at least in the OCC and the CFTD's minds, if they're domestic.

For us, Encore has the same policies and procedures, whether we collect in Phoenix, San Diego, Costa Rica, St. Cloud; or in India. So you're dealing with an Encore person at all times. And their [health is] their Consumer Bill of Rights, the same standards that both the CFTD and the OCC would like to see.

And there's no difference when we collect. There is a difference between outsourcing and off-shoring. But here, as I said -- and we've told this to all these issuers that have come through, and we have many presentations on this -- that you're dealing with one Encore, regardless of where that phone call or that customer contact is made.

But the acquisition of Encore, then -- there is no intention to build out further the US collections capability for those sellers? You're not seeing the sellers require, or say to you -- Encore, I want you to collect this in the US, or --

No, we have not seen that. We have not seen anyone come back and say they require us to do something.

Okay.

Then, just on the tax lien business -- and I'm sorry, I missed some of the opening comments -- the growth in the tax lien business this quarter, buying a portfolio, and just looking at the revenue -- what is going on with revenue yield? Did you buy that at the very end of the quarter? Because your revenue was right in line or a little bit below what we were modeling.

(Multiple speakers)

But you obviously had a much bigger portfolio.

True, we had a much bigger portfolio. And most of those purchases came towards the back end of the quarter, and the back end of, really, the month -- the last month of the quarter.

And then, what is going on with revenue yields on the tax lien business? Versus a year ago, say?

Like I think many other asset classes, yields are compressed. We still are generating very good risk-adjusted returns on that business. And as Ken mentioned, and we mentioned in our Investment Day, we view this business as an opportunity to deploy incremental capital that doesn't take away from the core and generates very good risk-adjusted returns. So the yields have, I think, come down everywhere over the last year. There's some very good yields that we're getting in that business.

And Paul, you have a separate financing facility for that business. What kind of leverage ratio can you maintain for the tax lien business?

Depending upon which state -- we're either deploying capital for buying tax lien certificates or originating tax lien transfers -- the advance rates range from 80% to 90% or so. So it's really state-dependent. But they're very strong advance rates. And we can maintain very good levels [above it] there.

Okay. So will you break that out separately, I guess? I'm not sure if it's broken out in the Q -- the debt and the equity in the tax lien subsidiary, or something like that?

The debt is certainly broken out separately for that --

Okay.

-- (inaudible).

And then, last question -- do you intend to take Cabot beyond the UK any time soon, or the expansion in some of the products? Is that all UK? Do you see opportunities outside of the UK through the Cabot platform in Europe?

Yes. Well, we closed Cabot just after July 1st. And so, I think we have some work to do domestically inside of the UK first in terms of the opportunities that are there.

I can tell you that we just came back from our board meeting and our operating meetings last week. I talk to Neil Clyne weekly, sometimes more than that. And I can't tell you how excited I am about the Cabot opportunity in terms of the opportunity to deploy dollars -- their people, their talent; and the overall momentum, both financially and operationally that they have.

So what we're going to do first is we're going to concentrate on continuing to grow that UK market. There's a lot of opportunities there, both in what's coming to market and the opportunity to do debt consolidation. It doesn't mean we're not going to keep our eye on doing other things in Europe. But right now, since we're just a little over 30 days into it, I want folks to focus on what we said we were going to do and execute against what we call our collaborative activity, which is improving, and the opportunity to go into the secondary, tertiary and the low-balance part of the market, which can give Cabot a great deal of income and also allow us to use our India site during the daytime.

Great. Thank you very much.

Mike Grondahl, Piper.

Just real quick -- you guys mentioned some of the smaller players had pulled out, or kind of gone away for regulatory or financing reasons. What percent of the overall market do you think has disappeared because of that?

I think, when you look at it, there are the top five players. And if you go back probably the last two or three years, those top five players have probably controlled 80% of the markets. And all these other players come in and out maybe on a particular buy. But I don't think overall they've been impacted since they disappeared. If that makes sense.

Okay. Thank you.

Mark Hughes, SunTrust.

In times past, you talked about some specific opportunities, I think, that you were attracting in the UK and thought those might be coming to market. Any update on that?

No. We reviewed the Cabot pipeline last week -- it looks strong. As I said, the third quarter has some seasonality, like our third quarter does. And they're optimistic about a strong fourth quarter. They exceeded their first half of the year buying goals. And you could see that in the over GBP1 billion now they have of ERC. And there are rumored to be some warrants and large issuers that are going to be coming to market. And if they do, then we'll be ready to risk a bid on those portfolios.

Right. When you are back in the fourth quarter purchasing at a more normalized level, should we anticipate that all of your cash, free cash, is going to go to portfolios? Or are you going to be paying down debt systematically?

We'll take advantage of the purchasing opportunities in the fourth quarter and deploy, given market conditions about what we've done in prior fourth quarters. And whatever cash is left over will pay down debt. So any free cash that we have goes to pay down debt.

But at least at this point, there's not a strategy for using that on a more consistent basis or deliberate basis? If there's some left over, you'll pay down debt, but you're not required to?

Correct. Yes, [the] revolving facilities that were not required to pay it down if we don't want to. But we would, because we're paying interest on it. So we'll pay it down.

Sure.

And we'll redraw it when we need to redraw it to [buy portfolio].

In the cash from operations, the impact from prepaid income tax, deferred income taxes -- was that related to the transaction? Or is there something else going on there?

(Multiple speakers)

It's normal course.

Okay. It looked a little bigger, more negative, this quarter than prior quarters.

Yes. It was a little higher this quarter. It was also a little bit higher in the second quarter of last year. But it's normal course, nothing unusual.

Right.

And then, just interest expense in the third quarter -- when you put all this together, can you give us kind of a range, as you're modeling it, how should that shake out?

Well, we've given you a breakdown of all the components of debt. And I think we've got disclosure in there in terms of what the coupon is on the debt. For the new convert that we just did, the accounting rate of interest will be 6.35%. That compares to 6% in the November convert. So I think with the disclosure on the debt levels, and the cash generation of the business, you probably have a good sense of the average debt opportunities for the quarter. But I think that's probably the best way to do [that math].

Okay.

And then, I would be remiss if I didn't see if you could expand a little bit when you say you think you'll be comfortably ahead of the prior guidance. Any more language you want to throw at "comfortably?"

That was the language that we chose. And I think what that means is that we feel comfortable that we can give you that without a lot of stress or anxiety around it.

Thank you.

(Operator Instructions) Larry Berlin, First Analysis.

Hey, a couple small things I missed as you guys -- I can't type as fast as I can speak -- first of all, what were the zero basis collections for the quarter?

DVA was three and change. I'll get you an exact number in a second. But I think it was -- DVA revenue was 4.7, and DVA collections -- DVA revenue is 4.7, which is about what collections are.

Okay, great. That covers it.

Second of all, what is the face value of what you purchased, not through Asset Acceptance in the quarter, but debt you purchased? You gave the price you paid. I'm just curious what the face was.

I don't have that with me here. I just have the total of those. We don't have that here, Larry.

Okay. Because I want to do that math.

Then, on the stuff that you bought with Asset Acceptance -- do you have the total for the quarter? You have $68.9 billion added on, as I read your thing?

(Multiple speakers)

So does that mean that the stuff is generally really, really old and a lot of it, as you run it through your staff, that's just going to be non-collectable? Or should I look at it more positively?

Well, I think when we announced the Asset deal, we mentioned that the bulk of that portfolio represent accounts we're not going to be working at all. So the [out of stat] accounts, the older accounts, accounts that are in certain asset classes that we typically haven't acquired -- life, medical or -- we just will not be working at all. So it's only a small percentage of that $68 billion of [pays] that will be -- we'll be actively engaging with those consumers.

Okay.

Then lastly, Asset has been working for two or three years on their own platform. And of course, you guys suspect -- feel that you have a much better platform. Do you now convert their employees in Warren, Michigan and so forth to your platform and jettison it? And then, lastly, how do you feel about the legal platform? Do you look and say -- oh wow, we could adopt this? Or do you leave it alone?

Yes. So I said the Asset transaction was somewhat of a complicated transaction. I look at it in three parts. First, there is the reduction of the public company infrastructure, which we just eliminate. That's the first part. Second part is taking accounts off the Asset platform and moving them onto the Encore platform, which we are doing. And as I said, we did 400,000 accounts just the other day. And then, the third part of the transaction is us migrating -- us being Encore -- migrating to Asset's internal legal platform.

So we've got several things going on here. And what we tried to do is pick the best-of-breed between the two companies.

Okay.

Thank you very much, gentlemen.

You're welcome.

Edward Hemmelgarn, Shaker Investments.

I'm just curious about the Asset Acceptance portfolio that you acquired. Could you describe a little bit what your expectations are for the collections profile, and how it might differ from a typical -- well, I guess there is no such thing as a normal Asset purchase -- but how, since it's such a large amount of purchases, the curve might be different than what your typical curve is?

The big difference, Ed, is due to the fact that when we acquired Asset, the portfolio was paying. So typically, when we acquire portfolios, most of those consumers are not paying. And so there is not as much cash generated from out of the gate. In the Asset portfolio, there's strong cash collections immediately, because there are a lot of consumers already paying in account manager [queue]. So that'll be the most significant difference from a portfolio that we would acquire. So the curve won't be as steep as a typically curve that we see because of the large number of payers.

Would you expect to get more, because of that -- more in the first few years or something than you typically do?

That's correct, we would.

All right. Thanks.

Thank you.

I'm not showing any further questions at this time. I'd like to turn the Conference back to our host for closing remarks.

Thank you, everyone, for joining us. And we look forward talking to you at our third quarter call.

Thanks again. Enjoy.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.