Good day, ladies and gentlemen, and welcome to the Encore Capital Group Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like introduce your host to this 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 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 risks. During this call, we will use rounding and abbreviation 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 we've filed on Form 8-K earlier today. 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 Ken Vecchione, our President and Chief Executive Officer.

Thank you, Adam, and good afternoon, everyone. I appreciate you joining us for a discussion of Encore's second quarter results today. Once again, we all delivered a disciplined approach to portfolio underwriting and management. We delivered strong performance across all the key financial metrics by which we manage our business. Excluding onetime expenses and convertible noncash interest, our earnings for the quarter were $0.85 per share. Paul will review the onetime 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 to the greatest likelihood of recovery enabled us to drive strong growth in collections. Adjusted EBITDA was $177 million in the second quarter, an increase of 20%. Our overall cost-to-collect decreased 70 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 portfolio purchased over the last few years, our estimated remaining collections, or ERC, at June 30 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 goal for the year and providing us with a better return than we would have…

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 lead to strong growth in ERC, which stood at more than $2.7 billion at end of the quarter. Taking into account that 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 portfolio is conservatively stated because of our cautious approach to setting initial curves and our practice of only increasing future expectations after sustained periods of overperformance. For example, as the result of sustained overperformance, we have slowly increased the multiples on a 2009, '10 '11 and '12 vintages to 3.0x, 2.8x, 2.5x and 2.0x, respectively, up from their initial levels of 2.4x, 2.2x, 2.0x and 1.8x, respectively. The $381 million allocated to investment in 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 $982 million of future collections from Asset's portfolio, representing a collections multiple of 2.6x. 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 it's primarily attributable to expected synergies when combining…

[Operator Instructions] Our first question comes from David Scharf with 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 will be relatively consistent with the 3 to 4-quarter guideline we gave you as it relates to the cost. If you remember, we did a large purchase from one of our competitors in the second quarter of last year and it took about 3 to 4 quarters before we had migrated the bulk of those accounts to our platform. So it will be along the same timeframe.

Okay. And along the same line, as we kind of look at the level of salary and employee cost in the quarter. Obviously, it didn't reflect the full 3 months 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 have the Asset closed on June 13, so effectively a little more than half a month of their cost, 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 will 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 3 or 4 quarters, we should be down to our cost-to-collect in general.

And don't forget, in that $33 million was $3 million of onetime charges, too.

Okay, got it. That's the GAAP figure. And it looked like there was still not an insignificant amount of purchasing in the quarter excluding the ACC allocation. With 40 odd million, was that just a result of kind of forward-flow commitments that you had to 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 on Asset Acceptance. Some of that was portfolios that we won, and we won them at what we consider to be attractive IRRs. So I would expect Q3 to be maybe meaningful, too, or maybe a little bit higher than Q2 in terms of the organic growth of deployment. And then, Q4, I would expect this to be at a normal run rate as we see some issuers coming back into the market.

Okay. And lastly, and then I'll get back in the queue. Just big picture, Ken, state of the market. I was reading the language in the queue regarding supply and pricing and it seemed to be very status quo oriented, such in so many words saying don't expect the supply and pricing environment to improve anytime soon. In your prepared remarks, however, you kind of noted that less-income, smaller competitors seem to be, for a variety of reasons, stepping back, exiting the business. We may have a couple large sellers entering the market. Just trying to kind of balance those 2 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.

Well, fair enough. So maybe taking a half a step back and looking at this 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 regulation is increasing. But still, the lion's share of the market is in 3 players' hands, and the top 5 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 CFPB and the OCC. So what we have seen, though, in terms of pricing is the main competitive, but different parts of the market are demonstrating slightly different characteristics. So the fresh and the BK market we've seen pick up somewhat, and the later-stage paper, we have seen beginning of the flattening of rising prices. I think that as we go forward, we think that there will be one large 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 had anticipated so that convergence is 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 then build the accounts for our account managers.

Our next question comes from Bob Napoli of William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Paul, you must be having a lot of fun with all the accounting on these acquisitions. You have another one coming.

That will be even more fun. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Just had a question on the OCC paper. They do say one thing to consider. There, it is that if you have international collections, they don't just say it, 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 -- or, I mean, I'm not sure if you're not going to be coating over the long run but you want to have a bigger presence of U.S. collections for those sellers and are there the sellers that will not sell if you are collecting outside of the U.S.? And so what do you think is the purpose behind that? Is it the ability to monitor compliance outside the U.S.?

Okay. So 4 or 5 questions in there. Let me see if I can remember them in reversal order. Yes, I think, what's driving is making sure that the OCC is encouraging the bank, the issuers to be able to have a first-hand inspection and be on-site. So I think that's sort of where they're going and the compliance will be easier with the OCC in the CFPB's mind if they're domestic. For us, Encore -- 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 they're held to the Consumer Bill of Rights, the same standards that both the CFPB and the OCC would like to see and there's no difference when we collect. There was a difference between outsourcing and offshoring. But here, as I said, and we tell this to all the issuers that have come through, and we have many presentations on this, that they're dealing with one Encore regardless where that phone call or that customer contact was made. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. So with the acquisition of Encore then, there is no intention to build out further the U.S. collections capability for those sellers. You're not seeing the sellers require or say "Encore, I want you to collect this in the U.S."?

No, we have not seen that. We have not seen anyone come back and say they require us to do something. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. Then just on the tax lien business, say -- and I'm sorry, I missed some of the opening comments, the growth in that 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 of -- your revenue was like in line or a little bit below what we were modeling which 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 back end of, really, the month, last month of the quarter. Robert P. Napoli - William Blair & Company L.L.C., Research Division: 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 saw generating very good risk-adjusting returns on that business, and as Ken mentioned and we mentioned in our investors day, we view this business as an opportunity to deploy incremental capital which doesn't take away from the core, and generate very good risk-adjusting returns. So while yields have, I think, come down everywhere over the last year, there are still very good yields that we're getting in that business. Robert P. Napoli - William Blair & Company L.L.C., Research Division: And Paul, you have a separate financing facility for that business. How -- 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 transfer so the advance rates range from 80% to 90% or so. So it's really state dependent. But they're very strong advanced rates. So we can maintain very good levels of leverage there. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. So we'll see -- I mean, will you write that out separately, I guess, I'm not sure if that's broken out in the Q, did that put the tax debt in the equity, in the tax lien subsidiary or something like that?

That is certainly broken out separately for that subsidiary. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And then last question. I mean, do you intend to take Cabot beyond the U.K. anytime soon? Or the expansion in some of the products, is that all U.K.? Do you see opportunities outside of U.K. through the Cabot platform in Europe?

Yes. Well, we closed Cabot just after July 1, and so, I think we have some work to do domestically inside of the U.K. 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 opportunities 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 U.K. market. There's a lot of opportunity 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. So right now, since we're just a little over 30 days into it, I want folks to focus on what we said we're 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.

Our next question comes from Mike Grondahl of 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 you think has disappeared because of that?

I think when you look at it, they are the top 5 players and if you go back probably, the last 2 or 3 years, those top 5 players have probably controlled 80% of the market and all of these other players come in and out maybe on a particular buy. But I don't think overall, that it's impacted. I was going to say it disappeared. If that makes sense.

Our next question comes from Mark Hughes of SunTrust.

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

No. We reviewed the Cabot pipeline last week. It looked strong . As I said, their 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 GBP 1 billion now they have with ERC. And they are rumored to be some 1 or 2 large issuers that are going to be coming to market. And if they do, then we'll be ready to bid on those portfolios.

Right. When you are, back end of 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? Are you going to be paying down debt systematically?

We'll be -- we'll take advantage of the purchasing opportunities in the fourth quarter and deploy, given the market conditions, about what we've done in prior fourth quarters and whatever cash is left over, we'll take 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, a delivered basis. If there's some leftover, you'll pay down debt, but you're not required to?

Correct. Yes. It's a revolving facility, so we're not required to pay down if we don't want to. But we would because we're paying interest on it. So we're going to -- we'll pay it down. And we'll withdraw when we need to withdraw it; it's cyclical...

Yes. In the cash of operations, there's this impact from prepaid income tax, deferred income taxes, was that related to the transaction or is there something else going on in there?

It's normal course.

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, 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 shakeout?

Well, we've given you a breakdown of all of our -- all of 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 converts that we just did. The accounting rate of interest will be 6.35%, that compares to 6% in the November converts. 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 outstanding for the quarter. So I think that's probably the best way to do it, Mark.

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

And that was the language that we chose, and I think what that means is that we feel comfortable. It means we can give you that without a lot of stretched reins around it.

Our next question comes from Larry Berlin with First Analysis.

A couple of small things I missed as you guys -- I can't type [indiscernible] speak. First of all, what were the 0 basis collections for the quarter?

DDA was 3 and change. I'll get give you an exact number in a second, but, I think, it was 3 -- DDA revenue was 4.7 and DDA collections -- the DDA revenue was 4.7, which was about where collections are.

Okay, great. Second of all, on the -- 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 pay; can you discuss what the face was?

I don't have that with me here. I just have the total though, we don't have that here.

Okay. Then on the stuff that you bought with Asset Acceptance, do you have a total for the quarter, you said $68.9 billion added on? Is that right, you think? So that stuff is generally really, really old and a lot of it, as you ran it through your stats, is just going to be non-collectible. Or shall I look at that more positively?

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

Okay, and lastly, the Asset had been working for 2, 3 years on their own platform. And of course, you guys suspect -- feels 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 how -- lastly, how do you feel about their legal platform? Do you look and say in a while, "We can adopt this." or do you leave it alone?

Yes, so I've said that the Asset transaction was somewhat of a complicated transaction. I look at it into 3 thoughts. First, there's the reduction of the public company infrastructure, which we just eliminate, that's the first thought. Second thought is taking account off of the Asset platform and moving them on to 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, the 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 2 companies.

Our next question comes from Edward Hemmelgarn from Shaker Investments.

It's 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, I guess, there is no such thing as a normal asset purchase. But how -- since it's such a large amount of purchases, how 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 acquired the portfolio, most of those consumers are not paying. And so there is not as much cash generated out of the gate. The Asset portfolio, there's strong cash collections immediately because are a lot of consumers already paying in account manager queues. That would be the most significant difference from a portfolio that we would acquire so the curve will be -- won't be as deep as a typical curve that we see because of the large number of payers.

What would you expect to -- to get more because it adds more in the first few years or something than you typically do?

That's correct.

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 to talking to you at our third quarter call. Thanks, again. Enjoy.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.