PRA Group Inc (PRAA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Portfolio Recovery Associates earnings conference call. My name is Chanel, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jim Fike, Vice President of Finance and Accounting.

Good afternoon, and thank you for joining Portfolio Recovery Associates fourth quarter and year-end 2011 earnings call. Speaking to you today will be Steve Fredrickson, our Chairman, President, and Chief Executive Officer; Kevin Stevenson, our Chief Financial and Administrative Officer; and Neal Stern, our Executive Vice President of Operations. We will begin with prepared comments and then follow up with a question-and-answer period. Before we begin, I would like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical, including Portfolio Recovery Associates, our management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future, including with respect to the future portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors, and future contributions of the subsidiaries to earnings are forward-looking statements.

These forward-looking statements are based upon management's beliefs, assumptions, and expectations of the Company's future operations and economic performance, taking into account currently available information. The statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission. Including, but not limited to its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K filed with the Securities and Exchange Commission and available through the Company's website, which contain a more detailed discussion of the Company's business, including risks and uncertainties that may affect future results.

Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in the Company's expectations with regard thereto, or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based, in whole or in part. Now, here's Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending the call. On today's call, I'll begin by covering the Company's operating strategy and the current regulatory legislative and market environments. Neal Stern will then talk to you in more detail about our operational strategies. And finally, Kevin Stevenson will discuss our financial results in detail. After our prepared comments, we'll open up the call to Q&A. This quarter was the culmination of an incredible year of growth for Portfolio Recovery Associates. During the full-year 2011, we created a 23% increase in revenue, while our operating efficiencies growth, net income growth of 37%. Notably, in this, our sixteenth year in business, we surpassed the $100 million net income milestone and invested more than $400 million in portfolio purchases, and we accomplished this while significantly deleveraging our balance sheet. I'm proud of all our employees for their excellent work in 2011 and their continued focus on our customer and client needs during these challenging economic times.

Our fourth quarter was equally impressive, with growth in revenue of 17% and growth in net income of 29%, generating record EPS on a diluted basis of $1.54. All of this was accomplished despite the typical seasonal weakness in cash collections we normally see in the fourth quarter. Neal Stern will provide more commentary on that in a moment. The market for charged-off and bankrupt receivables continued to be quite competitive in the fourth quarter, although generally at levels where an attractive rate of profitability can be earned by highly efficient operators that have underwriting models built upon many years of retained purchases. We're seeing continued evidence of some competitors choosing to leave the market. Deal flow continues to be solid, with a pick-up in the resale market.

In January, we announced that we acquired Mackenzie Hall, a collection firm located in Kilmarnock, Scotland and operating throughout the UK. PRA has been looking for the right international acquisition for nearly a decade, but had never found what we considered the right combination of opportunity, cost, value, company quality, and management depth. We feel the Mackenzie Hall purchase fits all of our criteria. It's both a contingent fee collector and debt purchaser. The firm offers a nice diversity of revenue and net income. With 170 employees and seven years of operating history, the company is of reasonable scale and offers significant growth opportunities. The management team is sophisticated and strategic and offers a very good cultural fit with PRA. We believe we can help accelerate growth by assisting the Mackenzie Hall team in developing more advanced analytics and modeling, especially as it relates to debt purchase underwriting and operational strategies. We also anticipate providing additional capital to the Company to enable an expansion in its debt purchasing.

As we've long stated, we manage PRA for the long-term, choosing to focus on persistent growth in earnings for our shareholders as opposed to trying to manage to short-term quarterly results. This approach has permitted us to build businesses and strategies effectively over the long term, producing substantial successes, such as our bankruptcy business and our internal legal process. Using this same long-term approach, and as a result of an exhaustive review of our legal strategy completed in Q4, we've determined that we can drive a meaningful level of net incremental cash flow and net income by expanding our investment in legal collections, primarily through our legal cost line item representing our investment in court costs. As a result, we will be increasing the 2011 run rate on such costs from about $10 million per quarter to about $24 million in Q1 2012 and about $14 million per quarter thereafter. As those of you who have followed PRA know, we expense our legal costs in full as incurred, although the corresponding increase in recoveries will not be sufficiently realized to offset the expense until 6 to 12 months after the expense is incurred.

Although our modeling indicates that the net cash flow effect of this strategy will be neutral for full-year 2012, it will have some downward pressure on EPS for the year as a whole as a result of amortization. The exact amount of impact will depend on how effective our strategy change is, but our best estimate at this stage is that EPS could be negatively impacted by approximately $0.30 to $0.50 per share in 2012 when compared with the status quo and relative to the number of currently shares outstanding. We believe the negative earnings effect will be most significant in Q1 and Q2 before becoming neutral to positive in Q3 and Q4, again as compared with the status quo. This positive net income effect should then continue into 2013 and beyond. We believe that the vast majority of the accounts put into this expanded strategy would not have otherwise paid us, creating net incremental collections.

We believe this investment will have an attractive return, targeted at about 2 to 1, with an expected payback of 6 to 12 months and significant profitability thereafter. This enhanced level of cash flow and income will also make us a more competitive bidder for new purchases, as any given portfolio should yield higher returns for us using this more aggressive legal strategy. I understand that no one is excited about downward pressure on near-term earnings. However, the long-term impact of this change in strategy is so strongly positive that it more than merit the short-term pain. We're very excited about the results we believe we can drive as a result of this additional investment. Both Neal and Kevin will give additional insight on this strategic change.

Turning to the regulatory and legislative front, we have seen few developments since our last call. We do see a quick demise to a bill introduced in the House that was intended to modernize some aspects of the TCPA. The bill addressed several issues pertinent to the collection industry, although much of it was designed to assist other interests. Consumer advocates and various state attorneys general vigorously opposed the bill due to a number of non-collection related elements, which ultimately resulted in the bill's withdrawal. Following the appointment of the new director of the Consumer Financial Protection Bureau, we met with staff there to open a dialogue.

As a result of our meeting we are optimistic of a very constructive relationship with the CFPB and feel that our long prohibition on account sales, our rigorous compliance program, and our demonstrated efforts to resolve customer issues all addressed CFPB priorities. We continue to proactively engage our state and federal level elected officials, as well as state attorney general and regulators in an effort to help shape any future regulations. But above all, we're focusing on our operational compliance to continuously prove ourselves as the compliance leader in the industry, lending credibility to all of our discussions.

Finally, our Board has authorized the implementation of a repurchase program. The program will allow us to repurchase up to $100 million of our common stock. The repurchase program is for an indefinite period and may be suspended or discontinued at any time. This action by the Board reflects their confidence in PRA's long-term financial outlook. We intend to implement the program opportunistically depending on prevailing market conditions. I'd now like to have Neal Stern, our Executive Vice President of Operations provide you with a summary of our operational strategies. Neal?

Thanks, Steve. Our fourth-quarter operational results reflected strong year-over-year growth. Compared with the fourth quarter of 2010, collections from purchased bankrupt portfolios increased 34%. Looking at the core portfolio, call center collections were up 14%, while legal collections increased 28%. External legal collections finished 23% higher, and internal legal collections were up 37%. Internal legal collections accounted for 40% of our total legal collections, up 8% on a relative basis from the same quarter last year. In the fourth quarter, we received just over 1.7 million payments, which was 400,000, or 30%, more payments than we received in Q4 of 2010 when the number of payments had increased by 72% over 2009.

For the full year of 2011, we received almost 2 million, or 43%, more payments than we did in 2010. This growth rate demonstrates strong purchase activity, increased productivity, and an ongoing commitment to working with our customers to find workable payment solutions. Our average payment size was down from Q4 2010 by 4%, and for the full-year 2011, our average payment size was down by just under 7% over the prior year. Average payment size decline has been an outcome of improved operational efficiency for some time, as we've been able to profitably work accounts with lower scores and balances.

Fourth-quarter operational results demonstrated normal seasonality, which reduced productivity. Seasonal trends tend to help collections the most in the first quarter, when tax refunds are being received, and dampen collections the most and fourth quarter as the holiday season lowers our contact in the call centers. While overall measures of collections productivity improved from Q4 2010 to Q4 2011, during Q4, site-specific productivity per hour paid decreased by approximately 5% year-over-year as a result of a strong increase in non-collector assigned collections. As a reminder, this site-specific productivity figure looks only at hourly paid productivity by collection representatives. It excludes not only non-collector assigned inbound-generated collections, but also legal and bankrupt collections.

In a year-over-year comparison, productivity increased 5% in Kansas but was down at the rest of our domestic sites, as hiring expanded in preparation for Q1 of 2012, when we tend to experience seasonally strong results. As expected, productivity fell most significantly in Birmingham, where we began to more aggressively add staff to fill our newly expanded call center announced last August. Birmingham productivity fell by 26%. Jackson productivity was down by 8%. Hampton productivity was down by 6%, and Norfolk productivity was down by 2%. For the full year, productivity improved at all of our locations, and the total was up by 5% year-over-year.

On an absolute basis, Kansas remained our top call center for the quarter. During the quarter on a relative basis, Norfolk was 83% of the Kansas standard, Jackson was 80%, Hampton was 77%, and Birmingham was 58%. The gap in this performance measurement was primarily driven by the additional hours added at our sites, while the total hours worked at our Kansas facility remained stable. As a reminder, our sites in the Philippines and Panama tend to receive accounts that are more difficult to collect. Since our labor costs are lower in these areas, it's less expensive to for us to work these tougher accounts. The combined performance of those sites finished at 58% of the Kansas standard and improved their productivity by 29% over Q4 2010.

Our investment in court costs were slightly lower than they were in Q4 of 2010, but for the year, costs were up 19%, primarily as a result of incremental purchase volumes and a change to our scoring model made in Q3 of 2010. As Steve mentioned, we're planning to increase our spending on court costs in 2012. What will not change is our philosophy on taking legal action. It has been and remains a Company goal to only file lawsuits on the minority of accounts where we've attempted to collect in our call centers, identified an asset, and have not been able to compel the account holder to pay. In other words, won't pays, not can't pays.

Given this philosophy, it's important to note that part of our increase in court costs for 2012 is coming from the increased purchase activity in 2010 and 2011. Those accounts have been thoroughly worked in our call centers, and for a small percentage of those accounts, legal action is now appropriate. The other driver of our increased costs is the result of a strategy change that has grown out of our strong confidence in our legal scoring model. This change will move the percentage of accounts selected for legal collection activity from 5% to about 8%. As Steve said, that change will generate more costs in Q1 than in the remaining quarters of 2012. We're allocating more dollars to legal costs in Q1 because the strategy change lends itself to a one-time catch-up.

Over the last several years, we've made a number of revisions to our purchasing models, our dynamic score, and our legal score. Our track record for improving bottom-line results has been very strong. I am extremely confident that the latest change will produce similarly strong results, and we'll be tracking this very closely over the coming months to monitor its success. Finally, I want to talk very briefly about the work my team will be doing with Mackenzie Hall. At a high level, our initial work will center on the use of dialer technology and on developing new scoring models and methods. The latter will be the more time-consuming component, as we'll need to understand the structure of their data. But I'm very excited to be working with the management team at Mackenzie Hall, and we're all optimistic that we'll be able to improve productivity as result of this work in the coming quarters. With that, I'll turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative Officer. Kevin?

Thanks, Neal. By now, you've likely seen our fourth-quarter and full-year 2011 earnings release, so I will focus on key line items and highlights. I will also expand on the legal cost discussion. Additionally, before I begin, I would like to point out that all of the comparisons I provide will be from the fourth quarter of 2010 to the fourth quarter of 2011 unless otherwise noted.

Financial results were strong during the quarter and included the following highlights. Net income of $26.6 million was up 29% from $20.6 million. For the full year, net income was $100.8 million, up 37% from $73.5 million in 2010. Diluted earnings per share advanced to $1.54, up 28% from $1.20. Diluted earnings per share for the full year was $5.85, up 34% from $4.35 in 2010. Return on equity was 18.2% in the quarter, up from 17.1%. Return on equity was 18.6% for the full-year 2011, up from 16.6% in 2010. Cash collections on finance portfolios increased 25% to $180.3 million in the quarter, while experiencing seasonal trends which typically occur during the fourth quarter. For the year, cash collections were up 33%. Cash collected on fully amortized pools was $7.6 million for the quarter, versus $9.9 million in the year-ago period.

Total revenues grew 17% to $118.1 million, up from $100.8 million and were comprised of $102.7 million in finance receivables, or NFR revenues, and $15.3 million in fee revenues. For the full year, our revenue of $458.9 million was up over 23% from 2010. The $102.7 million in finance receivables revenue for the quarter was comprised of $63.9 million, or 62%, in core portfolio revenue, net of an allowance charge of $2 million and $38.8 million, or 38%, in bankruptcy portfolio revenues, net of an allowance charge of $1 million. Net core portfolio revenues increased 21% in Q4, while net bankruptcy portfolio revenues increased 22%. For the year, core portfolio revenues increased 28%, while bankruptcy revenues increased 33%. This quarter's principal amortization rate was 43%, versus a rate of 41.3% in the fourth quarter of last year, and the Q4 rate was relatively flat to the Q3 2011 rate of 43.5%. Net allowance charges in the quarter totaled $3.1 million, or 0.33%, of net finance receivable balance.

As we disclosed in our press release, you'll notice that these allowances center primarily on deals 2007 and earlier, and were comprised of $4.5 million in new charges coupled with reversals of $1.4 million. The $15.3 million in fee income was down by 4%. This was largely due to a decrease in revenues from PRA Location Services. Sequentially, fee income increased by 35%, due primarily to seasonal increases in the government services business, along with an increase in revenue generated by our CCB subsidiary. For the full year, fee income totaled $57 million, down 9% from 2010. Operating income was $46 million, compared with $36.3 million and increasing 27%. For the full year, operating income was $178 million, up 37% over 2010. PRA's quarterly operating expenses increased 12%. This increase compared favorably with the growth in revenues and cash receipts of 17% and 22%, respectively, and this positively impacted our operating margins.

Our operating margin was 38.9% for the quarter. Excluding the fee-based businesses, the operating margin would have been 42.9%. The ratio of operating expenses to cash receipts continued to improve. During fourth quarter of 2011, that ratio was 36.9%, compared with 40.2% in the year-earlier period. Legal collection fees, which are contingent fees we pay to third-party attorneys for legal cash collections, increased by $1.1 million, or 23%. Legal collection costs decreased by $222,000. Legal collection costs consist of court costs and related document expenses, which are incurred in pursuing legal collections. These costs are expensed as incurred and in our view represent an additional investment in an account. As we collect these monies back from the customer through the legal process, we record the return simply as cash collections.

Both Steve and Neal spoke of plans to increase the legal costs investment for 2012. I'd like to add further color to this discussion relating to the potential estimated earnings per share impact of $0.30 to $0.50 for the full-year 2012. This estimated impact depends not only on the success and accuracy of the scoring and strategy, but also depends on which pools are impacted by the influx of legal cash resulting from the legal action. As I mentioned earlier, when we pay a fee to a court to file a lawsuit, we expense that payment on our income statement as incurred. If those expenditures are subsequently collected from the customer through legal process, those monies flow into and through the income recognition process as cash collections from the customer. In other words, we recognize gross expenses while also recording the gross cash flows which drive revenue.

That means, as Steve mentioned, that while we believe this effort for 2012 will be cash-flow neutral, the gross cash flow into PRA through the income-recognition process will drive revenue results impacted by amortization rates relating to the pool where the account resides. Therefore, while our best estimate of the earnings per share impact is about $0.30 to $0.50 for the full-year 2012, the impact could vary up or down based on both strategy and amortization rates. Please also take special note of Steve's comment relating to this incremental 2012 spend and how it will be more pronounced in Q1 as compared to the rest of the quarters in 2012. Also note at this time, we are only providing full-year earnings per share impact estimates. We are not providing any quarterly estimates other than the general comment that Q1 will be impacted to a greater extent than the remaining quarters.

Moving onto the balance sheet. Our balance sheet remains strong. Cash balances ended the quarter at $27 million, while our debt outstanding decreased to $221 million. As evidence of our extremely strong cash flow, during the full-year 2011, we reduced our outstanding debt on our line of credit by $80 million. From $300 million at year-end 2010 to $220 million at year-end 2011, even as we invested more than $400 million in acquiring portfolios of core charge-off and bankrupt debt. During the quarter, PRA invested $88.9 million in 83 defaulted debt portfolios from 12 different sellers. This represented $1.2 billion in face value and was comprised of $46.4 million, or 52% bankrupt paper, and $42.5 million, or 48%, core charge-off paper. The net finance receivable balance increased to $927 million as of December 31, 2011 from $831 million at year-end 2010. The net finance receivable balance is the amount of unamortized purchase price that is on our balance sheet.

Our debt-to-equity ratio at quarter-end stood at 37%, down from 62% at year-end 2010, and the availability under our line of credit was $187.5 million. Our debt-to-equity ratio including the deferred tax liability was 70%. Our deferred tax liability increased during the year by $29 million, ending the year at $194 million, up from $165 million as of December 31, 2010. This deferred tax liability is the result of a timing difference, not a permanent difference, between GAAP --generally accepted accounting principles -- and tax income. We are required to follow the guidance of ASC 310-30 for GAAP revenue-recognition purposes but use cost recovery as our revenue-recognition method for tax purposes. I would like to continue to point out that while the full tax expense has been recorded on our GAAP financials, we do not accrue any interest or penalties under generally accepted accounting principles, since it's our belief that it is more likely than not that we will prevail in tax court. Lastly, as a follow-up item to last quarter's call, we had discussed our intention to file a petition in US Tax Court. We indeed filed that petition in Q4, and we are currently waiting a response of filing from the IRS to that petition.

As Steve mentioned, our Board has authorized us to implement a share repurchase program of up to $100 million of our common stock. Our strong operating cash flows provide us with the flexibility to opportunistically use this program to enhance shareholder value and take advantage of market displacements should they develop, and continue to maintain a strong balance sheet. Please remember that the estimated earnings per-share impact of the legal collection strategy that we described earlier is relative to the number of shares currently outstanding. We are producing internal strong cash flow and are well capitalized. With that, I've completed my prepared comments and would like to open the call up to Q&A. Operator?

Thank you.

(Operator Instructions)

David Scharf, JMP.

Yes, thank you for taking my call. Wanted to delve in a little bit more on the strategy behind the legal investment. Obviously, the legal channel has always been a prominent part of your collection strategy. As we look at the productivity figures for the site-specific centers, which were down year over year, should we be thinking of this really on a consolidated basis? Was there anything in terms of the performance of some of these pools in your own centers that fell below your internal plan that's now leading to more investment in going to court? Or is this just a general shift in the overall channel strategy?

I think the observation about the decrease in productivity in the call centers is much more related to our successful hiring during the fourth quarter. Total productivity, including the inbound collections, actually improved year over year. So the metrics that I went over for the call centers, that strips out all the inbound collections, and on a rate basis, the inbound collections is more important in the fourth quarter, because outbound calls are tougher because it's harder to reach people during the holiday season. So just to be clear, productivity in total improved.

When we look at the call center productivity, we pull out inbound because we're just trying to measure the effectiveness of an outbound call. There, productivity was really depressed because our HR group did a really very good job of hiring in the fourth quarter. We generally try to beef up hiring in the fourth quarter to get ready for Q1, and this year they did a particularly nice job. So all of those added hours put the downward pressure on the call center. The incremental legal costs is certainly not related to any expectation of decreased productivity in the call center. It's just that we've grown very, very confident in our legal score, and we just feel very safe in pushing down our ROI hurdle and going after another group of accounts that we think will bring in significant incremental collections.

And is the bulk of this increase, legal collections, going to be handled all with your new in-house staff? Or do you have the capacity yet?

I think it'll be a similar split to what you see now. Internal legal this last quarter was 40% of our total collections. That's been incrementing up for the last couple of years. I think in the prior quarter, it was 37% or so. So it's been shipping up, so I'd expect to stay on trend. Probably be north of 40%, but certainly having that internal legal capability is something that gives us greater confidence in pushing more volume in that direction.

Got you. And Neal, I just want to circle back to the productivity metrics to make sure I understood. It looks like the collections per hour paid, when bankruptcy and external legal are excluded, on a year over year basis it looks like it increased 18 %, 16%, and 19% in the first three quarters of the year, and it was up 5% in the fourth quarter. There wasn't that increase hiring, and that corrects for seasonality. Are you suggesting without the increased hiring that the newer bodies that needed to be trained would've been closer to what we saw in the previous three quarters?

I think if we pulled out seasonality and increased hiring, I think it would be much closer.

Got you. Okay, thank you.

Yes.

And David, I just want to add one more thought as it relates to this legal strategy shift. We do not look at our task here as simply maximizing recovery. We are very, very focused on maximizing net income. And as Neal mentioned, he is always looking at his ROI for every given collection activity that we pursue. And what we simply convinced ourselves of with this shift in legal strategy is that we have a very attractive and significant ROI available to us by moving into a segment of the portfolio using the legal strategy that previously we were not extracting dollars from. So this is not a replacement strategy. This is, as we look at it, a net new gain that we're mining, as it were. And so we hope if we do this properly, representing almost no cannibalized collections and produces virtually all net new collections.

Just to clarify, Steve, are these accounts that on a go-forward basis would still typically be worked at your sites and then you've decided -- let me phrase it another way. Are these accounts that in the past, after working yourself, you would have just kind of folded the book and said we're just not going to recover anything? And now you're determining to pay that extra cost to take them to court? Or are these accounts that aren't worked in-house? It's just an entirely different channel from day one?

Yes, as I said in my --in the script, there's a big difference between won't pay and can't pay. If they are a won't pay and we've identified an asset, previously we may have given up because of the legal costs for going after that was too high and we didn't have enough confidence to bring our ROI target down. That's no longer the case for a small group of accounts. Again, in total we were only going legal on about 5% of our inventory. And this takes up only to 8%. Relative to many of our competitors, this is a very small number.

And are there any bottlenecks out there in the court system that could potentially represent hurdles? Are there capacity issues to how much these local courts can basically process?

Yes. I feel incredibly confident in our staff here, and I think they have a good handle on where the clogs are and where the capacity is, and we are directing this effort to make it net neutral from a cash flow perspective for 2012. So we will be very cognizant of where backlogs lie.

Got you. Thank you.

Yes.

Bob Napoli, William Blair.

Thank you. Question on the Mackenzie acquisition. I guess what is -- try to get some color on the level of accretiveness that you expect. You said immediately accretive. What is the revenue and net income of Mackenzie Hall? And how much amortization expense do you expect? Maybe -- I'd love to get a little more color on that and your strategic plans in the UK.

Specifically as to color on what we've got in terms of revenue and earnings, we just typically don't get that granular on the subs, and so that'll be the case here. From a strategic perspective, we see these guys as kind of a -- in many ways, an early-period PRA in the UK. We really are excited about the team, and the quality of personnel that they've got, really from top to bottom there. However, they are going down a number of operational avenues that we've already been, and we can really help accelerate their processes as we mentioned, especially as it relates to modeling and some of their operational strategies, their use of the dialer, et cetera. So what we're going to try and do is simply accelerate their growth, both through those operational assistance, but also in terms of providing capital to them. They've been capital constrained as it relates to their debt purchase. They've kind of done more of a bootstrap debt financing process, and we'll be able to supply them with capital to let them grow a little bit more, absolutely.

So, this business primarily right now is just -- is not -- the majority of it is service and not debt purchase. That was your plan to grow the debt purchase faster than -- at a faster rate?

Yes, that's right. Right now, they are more service than they are debt purchase. We hope to be able to grow both sides of the business, but I would expect that the rate of growth, again just given that it's a smaller size as well, the rate of growth for the debt purchase side is going to exceed that of the service side.

Okay. Just following up on your change in legal strategy, why now? It's kind of a clean cut going into the new year. You seem to have some pretty good earnings power coming out of the business. You have a nice write-up on the 2009 pools a bit. Why now? What gave you the confidence to make this change at this point in time?

Before I turn it over to Neal, let me just preface by saying that every quarter, we are making decisions about our ROI thresholds and where we're going to expand strategies and what we've learned from the feedback of various strategies and the payoffs historically. So we're constantly trying to evolve, Bob, in terms of how it is we mine our portfolio for net income. That being said, I'll let Neal talk a little bit more specifically about why now and what we saw to make the decision on the legal strategy.

So I mentioned in the script, we did a pretty good overhaul of our legal score in Q3 of 2010. So we've had more than a year now to observe how that score is performing. And we are at a point now where we went from confident to extremely confident. And that allows us to move the ROI threshold down without much worry.

Okay. And so you're saying this is cash neutral. You believe it's cash neutral to 2012, obviously GAAP diluted, but GAAP accretive, beginning early in 2013 under your models?

GAAP accretive, Bob?

Yes.

Yes, Steve mentioned that obviously Q1, Q2 will be more heavily impacted and then hopefully becoming neutral to positive maybe even as early as Q4.

Okay.

Mark Hughes, SunTrust.

Good afternoon. That was GAAP accretive on Q4?

That's just a guess on my part, but it could be. It could be. Certainly by 2013. Bob's real question was 2013, but I thought I'd give him a little better color on that.

Right. So if we look at the expense structure in 2013, would you assume that profitability would be better in 2013 using the typical measures?

Yes.

Better than 2011, to clarify?

Better than 2011?

Right.

I would say -- I didn't rush to compare it to 2011. I would say yes, though, if I had go on record. I'd say yes, that would be the case.

Right. So on a go-forward basis, the legal spending presumably drops back to a more normalized level, or at least it pays its own way, so to speak, by the time we get to 2013?

It depends what your normal is, I think. We bought a lot of paper and 2010 and 2011, and so there's a certain amount of volume that's going to push through and be ready for the legal channel as time moves forward. On a rate basis, I would think it would be more similar to where we've been, but still elevated.

But again, if the question is do we anticipate that 2012 is a accelerated legal spend year, and then 2013, 2014 are the beneficiaries thereof, and legal spend drops off, the answer is legal spend is not going to drop off. We're intending on making this more of a new baseline. Obviously, it's going to depend on the size of our portfolio and how much we spend in 2012 and into the future. But we're not anticipating necessarily that this rate is going to decrease after the 2012 spend. We would anticipate that that run rate would continue into future years.

Right. Will the extra revenue associated with the acceleration this year, will that be enough to cover the extra spending in future years such that the net effect would be margin stability or improvement?

That's the plan, yes.

Right, and again, it's relative to where we would have been rather than the depressed margins --

Right, exactly. Exactly. Where we would have been.

Right. Kevin, are you going to raise the yield as you do this?

That's a fantastic question and one that I struggled with and why I gave you guys the $0.30 to $0.50 range in terms of EPS impact, because early on, probably no. In the first couple quarters, we've got to see where it's coming in. But ultimately, if you take it all the way to the end, it's going to have, as Steve mentioned, it's incremental cash we wouldn't have collected. So theoretically, in the long-term, we'd really have a zero amortization rate with it over the long-term. But so yields probably will start tweaking up if this is successful over the next three, four quarters.

Thank you.

Hugh Miller, Sidoti & Company.

Hi, good evening. I guess, first, I had a quick housekeeping question about the tax rate as we think about entering 2012. What's a good number to assume there?

I haven't seen our provision for 2012, but I'm going to go -- using the same kind of tax rate you're seeing right now is probably the best place to start off with.

At the end of the year, it was trailing lower at 38%, 39%, whereas it was 40% to 41% in the first half of the year. So I'm just trying to figure what makes sense, I guess, going forward.

39.5%, yes. The general consensus around the table is about 39.5%.

Fair enough. Okay. That works for me.

We'll see how that works out.

Great. I had a question about operations in the UK. Can you just give us some color on the major differences that you see conducting business over there versus here from an operational standpoint? And also any differences in the regulatory landscape?

Do you want me to give you operational differences that I've observed that McKenzie Hall or in the UK in general?

Both would be great, I guess.

So I can tell you when we visited McKenzie Hall, we think that their use of the dialer and scoring could certainly be augmented. I'm not sure how common practice that is in the UK, but I can tell you relative to my experience, we think there's some opportunity there. The laws are different, but similar enough that they're easy to grasp. And on the whole, I'd say the laws make it easier to contact consumers than in the US.

Okay. And I'm sure that I'm wasting my breath on this question, but I'm going to ask it anyway. As we think about -- obviously, you talked about ramping up purchases in the UK and trying to grow that part of their business. Is there any context that you can give us as to -- I realize you tend to do things slowly and be conservative and grow as you learn, but with regard to some target or range or some sense of ability to deploy capital and purchases as you look at 2012?

I think that it's safe to say that under virtually any scenario, our comfort level deploying capital in the UK is going to be viewed by everybody as very modest. It's a smaller market than the US to start with, and McKenzie Hall has been buying relative to the scale that we're used to, very modest amounts of paper. And so especially as we get comfortable with modeling and collection results and everything else in 2012, I think that the opportunity to deploy capital is -- again, it's going to be very modest.

Okay, appreciate that. And in the commentary, your prepared remarks, you talked a little bit about the purchasing competition and opportunities in the resale market. Any color you can provide us on there and whether or not you anticipate that we could see receivable pricing start to come down in 2012? And that we could see additional people starting to -- or continuing to exit the business?

I think it's much easier for us to talk about people that have exited the market over the last three years than it is to give you a long list of people who have been net new entrants, let alone meaningful entrants. As pricing has gone up and as the regulatory environment has gotten tougher, it's just become a more complicated industry that's tougher to make money in. And I think that scale, operating expertise, knowledge of and the ability to handle the regulatory complexity, is just tougher and tougher for people to handle, and it's really the larger, more sophisticated debt buyers who are going to be the ones ultimately that I think are really able to compete in this market. And I think we're seeing some people that don't want to sign up for all those complexities dropping by the wayside. So it'd be our anticipation that we may continue to see this kind of thinning of the herd, but my -- I don't know if I would anticipate that we're going to see a meaningful drop in prices along with that, although who knows.

Okay, appreciate it. Thank you.

Edward Hemmelgarn, Shaker Investments.

Yes, thanks for taking the question. Would -- I gather from your assumption about the acquisition that we should expect that fee income would increase rather significantly in the first quarter because it's primarily a service business?

That's where the, Edward, that's where that will flow through. Part of that will flow through the fee income line, and we'll likely run that drill. So the finance receivable revenue on the income statement -- but we'll see -- that's what you should expect to see.

Where will you run it through?

It's both. Remember, they do both things.

They do both, but you said that they're primarily, though, as a fee-based collector.

That's correct.

We would expect to see some in the finance, but I imagine it pales compares to the amount of finance receivables that you collect in the United States.

Well, you'll -- we'll be able to see both of those, though.

But you would expect -- are we talking -- can you give us a rough idea of what kind of fee revenue they generate in the quarter?

No. No. We're not going to give any kind of guidance. But you'll see it pretty soon, though.

Okay. All right. Thanks.

All right.

Bob Napoli, William Blair.

Thank you. Your buyback, what are your plans on the execution of the buyback, over what timeframe? Are you price sensitive? To what extent? A little color on that would be helpful, and thank you for the buyback. That's good news.

Yes, as we stated, we have a open-ended mandate, and so we don't have a set time period or a specific price range. We have formed a special committee that's comprised of both Board members and management. And we'll be making contemporaneous decisions based on how we observe the opportunity and the stock price.

Okay. As far as the supply of paper in the market, what are you seeing? Are you seeing the consistent flow? Are you starting to see the flow slow down as credit has been so good now for the last year? Maybe a little color on the buying market as far as supply would be nice.

No, we've continued to see what we view as a pretty reasonable volume. And the volume coming direct from issuers is being supplemented more so than it has for a number of years with [retrade] portfolios and some of those retrade portfolios have been pretty good size. So there is some effect on the market of those non-direct sales that we haven't seen in a while.

Okay. The CFPB came out with a statement today that they're going to supervise the larger participants in the debt collection industry. Obviously you saw that. What are your thoughts on the CFPB supervising larger participants but not smaller participants?

We've known that it's coming for quite some time. Based on the early definitions that we saw of what large might mean to them, it's a fairly reasonable all-inclusive group, I think, for at least people we consider as reasonable and even semi-reasonable competitors. So it's not as though -- it looks like they'll be three or four of us that will be supervised, and everyone else will escape that. The other piece of commentary that we've got is we had what we would consider a very good meeting with CFPB, and they seemed like they were focused on the right things. And we're very optimistic that we can work well with them.

Great, and then just last on the court costs, on your legal scores, are you -- do feel like -- why are you suing -- why are you taking less accounts to court? And do think -- with your legal score, do think that what you've been able to do is unique to the industry on -- or not?

I think it's unique in that the Company has had a very long-term policy to not outsource accounts and to not resell accounts. And so I think our data set is tremendously unique. We know more about these accounts and how they perform over the long run than anyone, because of those policies and because we're very good about keeping our data. So we -- that gives us a very -- I think an amazing competitive advantage. I'm not sure I understood the first part of your question or not.

What are your competitors doing? Are you -- in taking this next up, are you taking more, a higher percentage to court?

Oh, gosh. Relative to our competitors, I think we bring a very small percentage of our accounts to court. So our philosophy has always been we really want to work these accounts in our call center and only take people to court as a last result. We do not buy accounts and sue them straight away. That just does not happen. Many of our competitors buy accounts, and there's a group of them to go straightaway to legal. That is not part of our plan. If you look at the total number of accounts that we have in our legal channel and the dollars that come in from our legal channel, they are much, much smaller than many of our competitors who are more aggressive.

Thank you.

Yes.

Mark Hughes, SunTrust.

The window for share buybacks, is it open tomorrow?

We -- actually, our window is closed for several days afterward, and so I believe it opens Tuesday? Is that right?

I believe it's Tuesday.

Just a question and maybe even part commentary. Your total expenses for 2011 are about $300 million. This incremental $14 million is about a 5% change. You've had a very good track record of consistency through thick and thin, and this represents something of a departure from that. I'm sure you could make a solid ROE case, and you have, that you'll get a great return off of this investment. But I'm interested in the discussion of the change in your practice, and the Board discussion of that. I guess you probably can't comment, but that just seems -- I'll make my own comment. It's just an unusual departure from your more consistent track record.

Again, we look at our mission as not having a consistent track record as much as maximizing the return for our shareholders. And as I said, it may not look like it from the outside, but I can assure you, as each quarter goes by, there is a lot going on behind the scenes as we make decisions about collection strategy and ROI that is estimated to be driven out of that. Few collection strategies have as significant a impact as legal does, however, because of how we expense those legal costs. And we also have, as we've gotten ourselves confident in this new legal score, we have a bit of a backlog of accounts that qualified for what we believe is a very attractive ROI, as Neil mentioned, lend themselves to kind of a one-time catch-up.

And so we think that again, if we're managing this Company for the long-term, and to maximize shareholder value, this is a very rational decision and one if we didn't make, we'd be playing to trying to manage the quarterly number game, and we've, I think, been pretty clear over many years that that's not how we intend to manage the Company. So we believe very strongly that this is a move that, when you guys look back a couple years from now, you're going to say gosh, that was a great, great move.

Thank you for that detail.

You're welcome.

You know what, Mark, if you're still on the phone, or if you're listening --

Yes, I'm here.

What I'm thinking about is that you look at a $10 million run rate, right, from last year, per quarter, and if you just think about a 15% or 20% growth rate just in terms of growth of expenses, you're already talking about a $12 million run rate. And we're talking about really $14 million, by incrementing that by $2 million a quarter in Q2 through Q4, roughly, it's really the Q1 that has -- bearing a large part of that in that expenditure.

Right, right. Exactly. It sounds like a good idea from a business perspective. Obviously, there's the offsetting factor from consistency, but you made a good case. Thanks for that.

And that concludes the Q&A session and I'll turn the call back over to management.

Thank you, operator. We don't have any more comments. That concludes the call. Thank you all for participating.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.