Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Encore Capital Group Second Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Glen Freter. Sir, you may begin.

Thank you, Howard. Good afternoon, and welcome to Encore Capital Group's second quarter 2012 earnings call. With me on the call today are Brandon Black, our President and Chief Executive Officer; and Paul Grinberg, our Executive Vice President and Chief Financial Officer. Brandon and Paul will make prepared remarks and then we will be happy to take your questions. Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the second quarter of 2012 and the second quarter of 2011. Throughout the call we will use forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you against placing undue reliance on these forward-looking statements, which speak only as of the date they are made. We will also use rounding and abbreviations in our conference call for the sake of brevity. For more detailed numbers and explanations, please refer to our Form 10-Q that was filed today with the SEC. We will also be referencing both GAAP and non-GAAP financial results. We believe certain non-GAAP financial measures provide useful information about our business. However, the presentation of this additional information should not be considered an alternative to, or more meaningful than, our results prepared in accordance with GAAP. Management utilizes adjusted EBITDA, which is similar to a financial measure contained in covenants used in our credit agreements, in the evaluation of our operations and believes this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. Additionally, we included information concerning adjusted operating expenses, excluding stock-based compensation expense, tax lien transfer operating expenses and acquisition-related expenses in order to facilitate a comparison of approximate cash costs to cash collections for our debt purchasing business. Once again, for a more complete discussion of these factors and other risks, please be sure to see our Forms 10-K, 10-Q and other SEC filings, including our press release issued as an exhibit to our current report on form 8-K filed today, which includes a reconciliation of non-GAAP financial measures. As a reminder, this conference call will also be made available for replay on the Investors 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 Brandon Black, our President and Chief Executive Officer.

Thank you, Glenn, and good afternoon. I appreciate your joining us for a discussion of Encore's second quarter results. Before beginning, I would like to recognize and thank Encore's nearly 2,700 employees for a fantastic quarter. Our results are a direct reflection of their collective effort and I appreciate their dedication and hard work. For the quarter, we delivered strong financial results while making investments that will provide long-term strategic advantages and further strengthen our industry-leading debt purchasing and recovery platform. Our deliberate and disciplined approach to portfolio underwriting and management drove record earnings, record collections and record operating cash flow. Cash collections increased 23% to $241 million. This increase was the result of strong purchase volumes over the past 2 years and our ability to identify and engage those consumers with the greatest likelihood of recovery. Looking at consumers' behavior, we saw payer rates and payment sizes remained consistent with prior periods. Earnings for the quarter were $0.82 after excluding Propel acquisition-related expenses, an increase of 41% over the prior year. Our overall cost to collect decreased 140 basis points to 39.5%. This reflects savings achieved through various operational strategies, which were offset by investments in our internal legal initiatives, the increased hiring at our new operating site in Costa Rica and additional spending required to proactively manage the changing regulatory and legislative environment. We are very pleased by our early success in Costa Rica, and we now have more than 100 employees. In the 5 months since opening, we have seen relatively limited attrition and steadily improving performance. Not only does Costa Rica significantly enhance our ability to partner with consumers who prefer to speak with us in Spanish, it will provide significant collections in the future. One of the most noteworthy accomplishments during the quarter was in…

Thank you, Brandon. As Brandon discussed, we had a very strong second quarter. Collections reached an all-time high 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. Earnings from continuing operations increased 41% to $0.82 per fully diluted share during the quarter excluding the $3.8 million of transaction and related costs in connection with the acquisition of Propel. Adjusted EBITDA, which represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $148 million in the second quarter, an increase of 27%. This strong cash flow allowed us to fund a significant portion of our portfolio acquisitions during the quarter. Our net debt levels at quarter end increased by $306 million from the prior year as a result of the acquisition of Propel and our large portfolio purchase, which we were able to finance without the need to raise more expensive junior capital or equity. Our overall cost-to-collect decreased 140 basis points to 39.5%, down significantly from 40.9% in 2011. We achieved these results even as we made investments to expand our internal legal channel and launch our new operation center in Costa Rica. We are often asked whether our cost-to-collect metric is comparable to others in the industry given the different approaches to accounting for court costs. In fact, if we had expensed the 100% of court costs incurred, and netted those against core costs recovered, which is consistent with the approach of some of our competitors, the impact of fully diluted earnings per share in the quarter would have been less than $0.01. 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…

[Operator Instructions] Our first question or comment comes from the line of Mr. David Scharf from JMP Securities.

I want to review a little bit on the productivity gains and the cost-to-collect. Setting aside just the aggregate improvement, the mix of collections this quarter for the first time in a while saw the needle dip below 50%, and obviously, that's the highest cost channel. Is this a deliberate trend, is it just how the accounts kind of spell out? I mean, because it obviously has a very material impact on your profitability depending if you assume legal is 45% or 55% of collections.

I don't think it's a trend. I think, on balance, we're likely to be about 50% legal and about 50% other. We have a little bit of incremental agency collections. But we think in general, we're going to be right around 50-50.

Okay. And as we think about just the investments you are still making on the internal legal initiative, can you give us a sense to just remind me what that cost-to-collect would've looked like this quarter? Excluding sort of the upfront investments you're still making.

So what we said, the guidance we gave around investments in legal in -- internal legal in Costa Rica is that we would spend about $0.20 for internal legal and about $0.06 relating to the investment in the Costa Rica facility. And those are -- they're not spread exactly evenly through the year, but they've increased a little bit from the first quarter and will continue to increase through the year. And the way we've calculated those investments is to take our standard cost-to-collect in the legal channel, apply those to the collections from internal legal and that difference is that $0.20. And the same thing for Costa Rica. We applied the standard cost-to-collect in our operating sites and looked at the additional costs associated with Costa Rica and that's what generated the $0.06.

And that hasn't changed since the initial guidance that was rolled out a few quarters ago?

It hasn't changed significantly, no.

Okay. Just switching to purchasing. If you exclude the one large acquisition from the competitor, it looks like, of the remaining paper, telecom was about 30%, which is kind of the high watermark. Once again, just a question of being opportunistic? Is it any -- should we draw any conclusions about supply of core credit card charge offs? Is that a level we should think about going forward or was it just an unusual quarter of telecom paper?

I think it was a little -- it was a slightly high quarter. We wouldn't expect to see that number for the rest of the year. There were a couple of deals that happened in the quarter that were large. But it continues to be an asset class that we are investing in and likely we'll try to invest more in it over time given the operating cost advantages that we have and the generally lower balances. But I wouldn't expect that to be the run rate for the rest of the year.

Okay. And lastly, back on the collection mix. Can you give us a little bit of help in how to think about, maybe, the second half in 2013, proportion of collections that will come from third-party agencies while you -- before you can transition some of the new AEF paper in-house?

It will probably go up by couple of percentage points. It won't go up dramatically. So it all depends on the contribution of the other channels. But if it was 6% this quarter, it's likely not to exceed 10%, and somewhere in between there. And then it will go down. We're bringing the accounts in every month, and so the third quarter will probably be the highest point and then it will decline. And by next year, most of that will be -- have been brought internally.

Our next question or comment comes from the line of Mr. Mike Grondahl from Piper Jaffray.

Can you talk a little bit about the competitive environment? I mean, have you seen a little bit of change in pricing in the third quarter? And then just maybe provide your thoughts how we should think about ZBA accounts second half of the year and into 2013.

Did you say DDA accounts? ZBA accounts. Sorry, I'll let Paul answer the ZBA question. On the competitive environment, we have seen pricing late in the second quarter, early in the third quarter, kind of up a little bit, which we think is natural given that a lot of supplies contracted for late the prior year and earlier in this year, and so it's generally a seasonally low period for portfolio supply, and that generally is slightly higher prices and that is a fairly consistent trend, which we anticipated. On the competition side, we haven't seen a lot of change. We continue to see the smaller to moderate sized debt buyers, I think, struggling with how to be competitive in this environment, and the other large buyers fairly well situated and able to compete on those deals.

And related to ZBA, it's been relatively flat over the last 3 quarters or so. It increased from last year, largely due to one pool group that went to ZBA and was still generating some meaningful collections. So with new pool groups coming on ZBA and others coming off, it should be relatively flat although it will decline over time.

Our next question or comment comes from the line of Mr. Hugh Miller from Sidoti.

Was wondering -- you guys -- I mean, obviously when we were out and you showed us your backup power supplies. But I just wanted to make sure that the situation abroad was not influencing your operations during the quarter.

It's kind of funny. It gives you perspective on how the media reports things and I can tell you that the -- our site has multiple days of backup fuel around generators but the actual impact to our site was measured in the couple of hours, not in the half a day or full day that you read in the newspapers. So the disruption, there was a disruption, it was much more minor than you would read about or watch on television, and we're completely prepared for a much more significant outage.

Okay. And you guys are breaking out the account managers domestically in the international, but I was wondering, can you provide us with a color on the Costa Rica relative to the India account managers?

As Brandon said in his remarks, we had just over 100 account managers or people in India by the end of -- at the end of the second quarter and the bulk of those were account managers.

There are 100 people in Costa Rica?

That's right.

Great. And you guys -- you talked about some of the opportunities to leverage your expertise with mailers for the PFS deal. Do you guys have a plan or is it part of the plan to kind of try and integrate some of the call centers that you have there, whether it's in Costa Rica or in India to try and utilize that as a means to kind of market to these individuals in Texas?

We continue to evaluate the right strategy, but it is our belief that we'll be able to augment the resources they have in San Antonio, but through domestic call centers. The international call centers is yet to be determined. We think that, that's a strength of ours and we'll use it as part of the strategy, going forward.

Okay. And as I take a look at kind of the bumps in the yield supply through the various vintages, it seems like you guys were most active in raising the pre-2005 pool and then also the 2010. Is there anything with those in particular that you're seeing that's giving you a little more confidence?

The 2005 is a reflection of just actual performance as we're getting very strong performance on that one. The '10 and '11 increased yields are, we've -- as we've say -- as we've said in the past, we wait for several quarters to see how we're performing and we feel very comfortable with the performance on those. And as a result of that, we're increasing the yields. We did the same thing with 2009. Last year, and over time, we'll continue to do that as we get more experience in more recent pool groups.

Okay. And I guess the last question I had was with regards to -- if I'm hearing you correctly, the purchasing during the second quarter was just a hair under where you guys had kind of commented before, and I believe you guys are sticking with the second half of the year purchasing assumption. So you're now targeting about $4.90 for the rest of 20 -- for total 2012?

That's right.

And is there any particular reason why you wouldn't probably just make up the slack in the second half of the year? The other $10 million or...?

That's a great question. We're certainly not saying we won't. That's a couple percent difference, so it doesn't -- moving to $10 million didn't feel like it was worthwhile doing. But if we see good deals at the back half of the year, as we said we'd be selective, we certainly will invest in them.

Our next question or comment comes from the line of Mr. Bob Napoli from William Blair.

Question on the just the -- on the legal costs as a percentage of legal collections, just to be clear on this, so for the second quarter in a row, your legal costs as a percentage of legal collections are down significantly to 35% range, 35.7% this quarter. You were running in the 40s last year and much higher than that in several prior years. I mean, is this a sustainable number? Do you -- can it improve further from here? And what drove the -- is it really moving it from external to internal that's driving that -- some of that improvement?

Well we do think it's a structural change and we would expect, again depending on volumes placed in the channel, you'll see fluctuation. But we do think we've meaningfully altered the cost-to-collect, and it's just largely a function of getting smarter each year about the accounts that we ultimately place through the channel. If you recall we started our significant investment back in 2006 and we're now, sort of, 6 years into the learning curve and we just believe we're getting more and more precise each time and that's effectively bringing down the, I'll call, the wasted core [ph] costs, which means placing those consumers in the channel that ultimately don't pay and we found ourselves being much more accurate, which means there's a lot fewer of those costs that we need to expense.

And relating to internal legal, right now, they're actually adding to the cost-to-collect overall in legal and we expect that -- we expect to be fully ramped up by the end of 2015 or so in the number of states that ultimately will go to. And at that point, we'll start seeing an improvement in cost-to-collect because we'll have been fully ramped up. Until that point, we're investing in the initiative, and so it actually adds to incremental cost-to-collect until then. And we got disclosure in the Q around what are dollars invested in internal legal, what those dollars are today.

Okay. Just on Propel, just to understand the kind of the seasonal -- the nature of that business. The loan balances in Propel, $139 million, is there -- does that kind of flatten out for the next 2 quarters and would then grow significantly in the first quarter? Or how does -- generally, what is the pattern? Is there a seasonal pattern to the growth of those -- of that?

So typically, the second quarter is one of the busiest quarters because of the July date where it becomes more punitive for homeowners in Texas if they don't take out one of these tax lien transfers. So the balance typically will grow through the second quarter and then moderate for the rest of the year. And then again, it's starting in the new year, and it'll start picking up again. Particularly the seasonality, so originations are typically highest in the second quarter then drop off for the remainder of the year then pick up again in the first and second quarters of the following year.

Was there -- has there been any progress in Texas -- I'm sorry, in New York or other states on the tax lien business? I know New York was going to have a -- you thought there was a decent chance -- that you think there is a decent chance that, that could -- that laws similar to those in Texas could be passed in New York or other states.

We continue to believe that. I think in New York, like in everywhere else in the country, getting things passed is difficult in an election year, so I think we made great strides in pushing the bill, getting it sponsored and think that we'll resume that once we get, sort of, through the election. But we've laid a lot of groundwork and are excited about what we can put in place next year.

Okay. If you just are in Texas, next year, what kind of growth do you expect for that business?

We haven't actually given out a growth strategy. What I can say is our business, our acquisition of Propel's base exclusively on growth in Texas. So we think there's a meaningful amount of growth given that the market is sort of penetrating 20% of the available consumers that are there. So we would -- we think there's meaningful growth that can happen next year, although we haven't given any guidance.

What was the growth in '12 versus '11 for that company?

We haven't finished up '12 yet. So there's still going to be...

Sorry, from where you are today versus a year ago, I guess doing [ph] a year ago.

Somewhere in the 10% to 15% range.

Okay. Then -- if your allowances -- you have $109 million in allowances, and with the improving -- continuing to improve on the collection side, it seems like some or maybe even a very significant portion of that could be brought back is -- and over time. Is that -- do you think that's -- am I thinking incorrectly about that? Or what are your feelings about -- obviously you're going to be very prudent. Do you see this -- I mean, there was a $2 million reversal this quarter. What do you expect on -- could happen on reversals over the next few years?

So I think we'll -- we will continue to reverse allowance charges if you go back to some of the vintages like the 2001 and '02 and I think even the '03. We were -- we've -- we're close to largely reversing all the allowances taken there. Some pool groups like 2005 and -- the 2005 through '08 where we took larger allowance charges and it's not likely that we will reverse all of those. But I think that we will continue to take those reversals over time. It's tough to say exactly, of that $109 million, how much will be reversed, but we'll continue to see allowance reversals.

Last question just on the last page of your press release. Just looking at kind of adjusted operating expenses, where are -- with the tax lien transfer in there, you're just trying to normalize the expenses for the -- for your core business?

That's right.

And then which line items are the acquisition related expenses in -- on?

They're in G&A.

They're on G&A?

Yes.

Our next question or comment comes from the line of Mr. Larry Berlin from First Analysis.

Just a question on Propel. Just what metrics -- financial metrics you guys used to look at the acquisition that got you comfortable with it? And that you think we should look at, at this point?

So what we focused on were a couple of things. One was the fact that we acquired a portfolio of almost $140 million that's generating an annual interest rate return of close to 14%. And so that's -- and as you know, the businesses, from a risk-adjusted basis that's a very strong return given the nature of the business and the 0 losses it's had historically. So that was one component that we looked at. And the other component we looked at was the fact that we were acquiring a platform that could generate significant originations of tax lien transfers going forward, and -- so we could grow that portfolio of 13% to 14% of high risk-adjusted return significantly in the future. And that's how we evaluated the transaction.

I'm showing no additional questions or comments in the queue at this time. Sir, I'll turn the conference back over to you.

Thanks once again for joining the call. And I look forward to speaking with you in a few months.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.