Good day, ladies and gentlemen, and welcome to the Encore Capital Group Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's call, the Director of Finance, Mr. Adam Sragovicz. Sir, you may now begin the conference.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Third Quarter 2013 Earnings Call. With me on the call today are Ken Vecchione, our President and Chief Executive Officer; and Paul Grinberg, our Executive Vice President and Chief Financial Officer. Ken and Paul will make prepared remarks, and then we will be happy to take your questions. Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the third quarter of 2013 and the third 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 abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, which was filed on Form 8-K earlier today. As a reminder, this conference call will also be made available for replay on the 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 third quarter results. Earlier today, we announced record financial results. This quarter, we delivered strong performance across all key financial metrics, reflecting outstanding performance from our core business and our 2 recent acquisitions. Our GAAP EPS was $0.82 per share. Excluding onetime expenses and convertible noncash interest, our adjusted EPS for the quarter was $1.02 per share. Paul will review the financial results in more detail during his presentation. The cash collections increased 54% to $380 million. This significant increase is driven by our acquisitions of Asset Acceptance and Cabot Credit Management, both of which we will address in more detail as we move through the presentation. Adjusted EBITDA was $234 million in the third quarter, an increase of 55%. Our overall cost to collect increased slightly by 20 basis points to 40.7%. This increase reflects the additional cost associated with Asset Acceptance acquisition. As we said previously, we expect a higher level of cost during the integration period. With the acquisitions of Cabot and Asset Acceptance, our estimated remaining collections, or ERC, at September 30, increased by $2.1 billion to approximately $4 billion. Our year-to-date results are equally impressive. Our GAAP EPS was $2.06, and after adjusting for onetime and certain noncash items, our adjusted EPS was $2.74. We're approaching nearly $1 billion in collections. Our adjusted EBITDA was $586 million and our cost-to-collect was 38.9%. These results reflect the disciplined and deliberate approach we've taken to deploying capital and building a very efficient operating platform, as well as the exceptional work of Encore's more than 4,200 people. To continue to deliver these strong results, it's important that we remain focused on solid execution, particularly on our acquisitions. At Asset Acceptance, we…

Thank you, Ken. As Ken discussed, we had a very strong third quarter, reflecting strong performance from our core business and our recent acquisitions. Before I go into our financial results in detail, I would like to let you know that as required by U.S. GAAP, we are showing 100% of Cabot's results in our financial statements. Where indicated, we will adjust the numbers to account for the noncontrolling interest. We collected a record $380 million, up 54%. Our call centers contributed 41% of total collections or $157 million compared to $117 million. Legal channel collections grew to $154 million in the quarter compared to $111 million and accounted for 40% of total collections. Finally, 18% of collections came from third-party collection agencies. As a result of the Asset Acceptance acquisition, we expect to see an increase in third-party collections as many of those assets have already been placed with third-party agencies at the time of acquisition. Because of our lower cost-to-collect and because we are better able to ensure a consistently positive consumer experience, we plan to shift much of this work to our internal channels over time. Also, for some of Cabot's purposes, we are contractually required to keep accounts with certain agencies for a period of time. Consistent with our stated practice and in keeping with our Consumer Bill of Rights, we had no portfolio sales in the quarter. Revenue from receivable portfolios was $225 million, an increase of 60% over the $141 million in the third quarter of 2012. As a percentage of collections and excluding the effects of allowances, our revenue recognition rate was 58.6% compared to 56.9% in 2012. For the quarter, we had $3 million in allowance reversals, all from ZBA, compared to $1 million of reversals in 2012. We had no allowance…

[Operator Instructions] First question comes from the line of David Scharf from JMP.

I'll just start off with 2 and then get back in line. The first has to do with just the yields that you wrote up this quarter. I mean, obviously, you've been presumably booking your collection curves pretty conservatively the last couple of years and inching up the yields a little bit over the last 6, 8 quarters, but it was a very pronounced increase on, really, all recent vintages. What happened in the third quarter that led you to write them up as much as you did versus what you saw the last year?

Actually, Dave, we did increase them this quarter as we have for the last couple. The one slide that we showed with the multiple, shows the cumulative increase in the multiple since the beginning of time, not just the amount for this quarter. So in fact, the yields this quarter were not -- the increases were not materially different than they have been the last couple of quarters.

Okay. Yes, I was just reflecting on the collection multiples in the Q relative to...

Yes, those multiples are the cumulative increases in multiples since we purchased those pool groups. So the increases this quarter were actually relatively moderate, probably, actually even a little bit lower than the last quarter. So that slide represents cumulative, not just this quarter.

Got it, got it. The second question, obviously, it's the topic of the day or it has been the last week; offshoring. Can you give a little more color about the 2 issuers, one that specifically requested the other that you expect to? Have they specifically just referenced sort of a blanket comment about the OCC guidelines saying they just don't want to have to deal with any issues down the road, or were there more specific issues regarding offshoring that they had? And for those that did not request that all servicing be done domestically, did they put any limits on the percentage of the placements that would be offshore?

Okay. This is Ken. So first, the one issuer that requested us not to do any offshoring and the other that we think will make that same request, they're both out of the top 5, okay? One of them just has more of a U.S.-centric focus as a business philosophy, and the other has said that they want to be more conservative at the outset of this. And then indications are, to us, that over time, they will loosen those -- that conservative posture. And regarding the other folks, no, there hasn't been any other restrictions on the other issuers that we're dealing with.

The next question comes from Bob Napoli from William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: I guess, maybe if you could give some updates on -- you had talked about a new market. I guess, I was wondering if you could give any color on the new market. And then the Cabot, the U.K. buying, I was wondering if you could give some thoughts on the level of purchases you expect to make out of the U.K. through the balance of this year.

Okay. We -- that's a little bit of -- the India debt-buying market is a little bit of a tease for you. To give a sense of that, we have a great opportunity to do domestic collections in India. The India market is large and getting larger. So it's about $10 billion today, and we project it to grow to about $19 billion in 2017. It's very much a fragmented market, and we believe by starting slowly, and we plan to start towards the end of 2014, we'll be able to bring the same discipline and customer- and consumer-centric approach that we have here in the U.S. Absent that, I don't feel comfortable enough yet to give you the full details. It's -- we're rolling it out, we're working on it now, and I think it'll make for an interesting conversation come the middle of June when we have our Investor Day. But it's just to show you that the India center has a lot more flexibility to it than thinking that just as a call center. I'm sorry -- oh, second question is about Cabot. Regarding Cabot's purchases and going forward, I would say they're good for north of GBP 100 million of purchases per year, all right? And like the U.S., there'll be some seasonality to it, a little bit quieter in Q3, and should be heavier as we move throughout Q4. As with the U.S., it also depends on the timing of when issuers want to sell. But we bought Cabot for many reasons, and one of the reasons, and I'll cite an investor note that came out, is probably the 12% growth rate that exists in the debt purchase market there, as well as what we believe will be consolidation activities. So if you think about…

Yes. So I think I'll just broaden that a little bit and just say all issuers are concerned with the vendor management guidelines that the OCC has produced. That's one. Number two, this has been an ongoing and evolving process. There have been some issuers that have come in 3 times. Because as they continue to do their audit, and they like what they see here, they go back and their risk management committees continue to push on them to think about other things and other concerns they may have that may be coming from their interactions with the OCC. So, yes, we have more auditing to do of our outside legal collection firms, and we're doing that and we're doing it at a more accelerated pace than what we currently have. And really, the only thing that -- so far, we've seen only one issuer has put in a cap as to the amount of accounts that we could litigate, and that account relative to what we litigate, there's such a bid [indiscernible] spread that you could drive a truck through that. It really doesn't really impact us at all. So that's what we're seeing from that point of view.

Our next question comes from the line of Fin O'Shea from Raymond James.

A lot of my stuff was answered here. Could you talk a bit about the competitive landscape in the U.K.?

Yes. Okay. So let me just take half a step back and talk to you a little bit about why we entered into the U.K., why we like Cabot, and that will also give you a sense of some of the market dynamics of that, because I think that will give you a good perspective. So we like Cabot because we obviously purchased the leader in the U.K. debt buying market. What we like about Cabot also is they grew methodically over the last 14 years. And Encore was fortunate enough to buy their platform, their intellectual property, their brand, $1 billion of ERC and a seasoned management team, rather than entering the market on a smaller base or sort of de novo and spending an enormous amount of resources to cultivate a growth strategy there. We saw when we looked at the U.K. that we thought consolidation would happen at a faster pace. It would resemble much like the U.S. market, may -- in fact, it may even grow a little bit faster than the U.S. market from this point on. And it was important for us to get the right platform. So we felt good about that. We even feel better these days that based upon the recent Arrow IPO, our equity in Cabot is now valued at about 2x the price we paid only 4.5 months ago. With that as a backdrop, the market dynamics are such that, again, I'm going to quote numbers from analyst reports, that there's a 12% annual growth rate in portfolio purchases from new sales and the sales of older portfolios. Banks still have to be -- are concerned about their capital levels. They will look to sell these defaulted receivables in order to improve their capital positioning. And also, as I…

Our next question comes from the line of Hugh Miller from Sidoti. Hugh M. Miller - Sidoti & Company, LLC: I wanted to start off with, I guess, on the purchasing side. It seems like when you exclude the Cabot deployment of capital that you guys are still buying close to about $60 million in the third quarter, was that all forward flow or -- from you and from Asset Acceptance or was there any kind of opportunistic buying that you guys were doing during the quarter?

Most of it are traditional buying that we do. There was no portfolio, big portfolio purchase in there. A couple of issuers may have had some clean-up portfolios, but they were nothing of any size compared to what we've been seeing and what we've done over the last couple of years.

And, I mean, about half of the purchasing came from Encore, half of it came from Propel. So you have to now include -- factor in Propel's purchasing capital deployment into the totals that we have. Hugh M. Miller - Sidoti & Company, LLC: Okay. Sure, sure. And, I guess, from the commentary that you guys had talked about with regards to issuers and some who may be likely to require onshore collections, I think you guys had mentioned, when they return to the market later this year, is that your expectation that 1 of the 2 companies that has yet to kind of return to the selling market should probably return before year end?

That is what they're telling us. Hugh M. Miller - Sidoti & Company, LLC: Okay. And have you seen any portfolios come to market so far in the fourth quarter or is it still yet to come?

Are you talking from that particular issuer or just in general? Hugh M. Miller - Sidoti & Company, LLC: Correct, correct. From that issuer.

No, that issuer has not started selling yet. That issuer, as we understand it, is just finishing up its audits and presenting the audit findings to its steering committee, and also presenting any remediation activities that have to occur to the particular debt purchasers. Hugh M. Miller - Sidoti & Company, LLC: Okay. And looking at the Propel business, as you guys had commented that you're now -- you've been deploying capital in 9 states, can you talk about -- obviously, one of the reasons why you like the Texas market was kind of the opt-in strategy with consumers having to kind of select you guys and trying to kind of export that model. Of those 9 states that you're buying in, how many have that opt-in model?

Well, our Texas is the TLT [ph] business. And most of the other states, with the exception of just Nevada now, are our TLC [ph] model. Hugh M. Miller - Sidoti & Company, LLC: Okay. And so is there a reason why you guys are kind of -- given how underpenetrated the Texas market is, is it just kind of R&D that you're buying in those other states or is there a reason why you're looking at that market where it's kind of a free for all on people bidding?

Well, it's just another way to deploy our capital, and we are trying to -- when we deploy our capital, we're trying to achieve our internal rates of returns that we want our hurdle rates, and we have an opportunity to do it in Texas or to do it in some other states. In addition, we're working on, as we start -- as we end this year and enter into next year, we'll be working with several other states to hopefully open up their TLT business like we opened up Nevada's. So we have a big legislative regulatory effort here that will begin pretty soon to see if we can get some other states to start doing TLTs as well. So we're still holding to about a 40% market share in Texas as it relates to TLTs. And similar to the U.S. with Encore, similar to Cabot, we're now beginning to see -- our early stages here now, but we're now beginning to see some acquisition opportunities that are occurring in Texas in the TLT business.

And here, as we had mentioned before, we have a separate credit facility that focuses on tax lien certificates outside of our Texas tax lien transfer facility. So deploying capital in those other states doesn't take away from our growth opportunities in Texas because it is a separate pool of capital. Hugh M. Miller - Sidoti & Company, LLC: Sure, sure. No, I certainly understand that, but I think you guys have kind of indicated that there was kind of a benefit to looking at an opt-in TLT model as opposed to just kind of bidding against other people for consumers that won't be opting in. But what are you guys hearing as maybe the reasons why some other states might be reluctant to move to a TLT model, if any?

I think some of it is education. They just don't understand yet what the TLT model does and how it helps consumers, and it protects them and it gives them the opportunity to have affordable payment plans at interest rates that are far less than what the states are charging. So as we go in and we start making that pitch, that education begins to resonate with these folks rather than thinking it's a company looking to get in there, buy tax liens and to take over properties. That's not our goal and that's not the business we want to be in. So as we educate the states, the treasurers, the state legislatures, that's what we need to get them to understand. And then we've just got to go in and continue to prove ourselves that we enter this business with high integrity, principle intent and pretty much the same focus that we have on -- in Encore, we have in Propel, again, being consumer-centric and consumer-focused. Hugh M. Miller - Sidoti & Company, LLC: Okay. And then just 2 more general questions. One, any update that you can give us on kind of where things stand with the class-action settlement and the issues outstanding with the state attorney general’s?

Conversations are ongoing, and that's probably all I'll say. Hugh M. Miller - Sidoti & Company, LLC: Okay. And then the last question, just about, obviously, given the strength of the quarter here, and you guys have kind of issued updated guidance as of the last quarter, is there any update that you're going to be giving us on a guidance level for 2013 earnings?

No, we've run out of words like comfortable and -- to give direction on the EPS. So I think you guys can look at the sort of where we ended this quarter and kind of extrapolate on run rates, and I think you can get there for 2014.

Our next question comes from the line of Sameer Gokhale from Janney Capital (sic) [Montgomery].

I just had 3 questions. I guess the first one is, I think, Paul, Ken, one of you made a comment about if you had to, you -- for accounts that want the collections work to be done onshore exclusively, if more people sign up for that, you could try to maybe reallocate some of your collectors and -- who works the accounts, and you can do that without too much difficulty. From an operational standpoint, I mean is there like some transition time that it would take for you to move those accounts around? I'm just trying to get a sense here for how much -- and you mentioned you had enough capacity here for collectors to do their work. So is it going to be -- would it be seamless in that instance, or would you envision there being some transitional issues if you were to move some of those accounts around in terms of the collections? How should we think about that?

Right now, I would say it should be more or less seamless. We do run with a excess capacity in our call centers. And we do that because sometimes, we never know when large portfolios are available, and we want to have the ability to have people that are experienced work on these portfolios. So it should be relatively seamless. And for us, it's just really just shifting around workflow from the U.S. into India. And as I said, we've got that capability. We've got that modeling capability, and we've already planned for that and we know what to do. So when the other large issuer comes back to market and if we can win our fair share of market share, then we'll be able to handle that and it'll be handled seamlessly.

And, Sameer, I think if you go back a few years, we had discussed with all of you, one other seller who had limited our ability to collect only to domestic. They've now shifted and they're allowing us to collect everywhere after they spent some time doing their diligence and understanding that we do the same type of collections in the U.S. and in India and in Costa Rica. But we've built the capacity to be able to shift volumes between sites. So if it happened a week from now, we'd be ready a week from now to do it.

Okay. That's very helpful. The other question I had was unrelated, but it's about payment sizes. One of your peers, I think, said that the payment sizes on what they've collected domestically have grown, it does seem like 3% or something with domestic year-over-year. Are you seeing a similar increase in payment size? And would you agree with the characterization of the paper that's been purchased, say, post-'09 after the Card Act was passed, as being, in a certain sense, higher quality than the pre-'09 paper because maybe, if you look post '09 after the Card Act, limitations based on who cards will be issued to and the terms and the like, is a better credit profile or better asset profile of those borrowers? So just some perspective on that would be helpful. Have you seen payment size increase? And then also, is it fair to say that the kind of profile of the average debtor has improved compared to the pre-'09 levels given the passage of the Card Act?

Sameer, we've never historically talked about payment sizes and whether they're going up or down from any period to the other. In terms of the second part of your question, I think they're, at origination, the credit quality of consumers post the recession were certainly better than those pre-recession. After they've charged off, the question is what does their profile look like. And what we've always focused on was -- is at the account level, whether a consumer can pay and how much can that consumer pay. So I think we're seeing different types of consumers. When they charge off, they're equally distressed pre- and post-2009. But I think generally, they were probably better consumers going into it, and we're generating strong collections from them today.

Yes, I understood. I mean, they clearly -- they're charged off, they're charged off and [indiscernible] I thought maybe that has something to do with their asset profile or ability to find jobs relative to the average profile of the consumer pre-Card Act. And so I was kind of asking from that end. But you're absolutely right. I mean at the end of the day, they've all charged-off. So I was really asking from the other angles, and it doesn't sound like there's been that much of a change from what you're seeing. I guess the last question I had was really on the balance sheet leverage. And obviously, you had these 2 large acquisitions that you made generating a lot of cash for you guys. But is it safe to say that for the foreseeable future, we're looking at any cash that's generated to be deployed more for a portfolio acquisition than for paying down your existing debt levels, so we shouldn't think of share buybacks within the foreseeable future as really being something that's on the table? Is that fair to say at this point?

Yes, I think that's fair to say that share buybacks are not in front of us at this point. And we see we have a lot of opportunities to deploy capital.

I would just -- just to give you some perspective, to give everyone some perspective. I mean we -- you all saw that we had close to $100 million of cash on our balance sheet at the end of this quarter. At -- in our core business, without our accordion, we have $270 million of capital available. And with the accordion, it goes up to an excess of $100 million. We've got close to a couple hundred million dollars available at Propel to deploy capital, in excess -- well in excess of $100 million at Cabot. So -- and we're generating a lot of cash. So we -- the business generates a lot of cash, has a lot of access to capital. So even though we have a lot more leverage now because of these 2 deals, we've got plenty of availability to deploy at making investments that create value for our shareholders. And the only other thing I'd like to point out is that a significant amount of the debt that is on our balance sheet today are these PECs. So there are a couple of hundred million dollars of -- that's classified as debt that ultimately is only going to be settled once -- as we plan to buy out the noncontrolling interest in Cabot. So while it is debt on the balance sheet, it's debt that's really not -- that doesn't have any interest that's paid or with no fixed maturity date and will ultimately be settled through the final outcome of the Cabot purchase.

That's helpful. And then I guess the other thing in relation to your capacity on the card facilities and the like results and your cash on hand is your adjusted EBITDA, which, if you analyze it, is about, I think, $940 million or something like that. So that should be [indiscernible]. But that's helpful color. [indiscernible] on how you're thinking about in terms of using cash. So that's all I had.

Our next question comes from the line of Doug Mewhirter from SunTrust.

Doug Mewhirter here for Mark Hughes. Most of my questions have been answered. Two more general questions. First, with regards to business mix, now that Cabot is on the books, I guess, how would we see -- some of the different line items shift a little bit. So is Cabot more legal heavy or less legal heavy, or more third-party or less third-party? I'm sure you've already previously disclosed this, if you could just remind me how that might shift a little bit going forward.

So right now, Cabot is relatively light in legal. It does very little litigation, and it's largely because Cabot has historically been buying semi-performing portfolio where consumers -- many of those consumers have already been in payment plans. Going forward, we plan to expand into other segments into older portfolio and lower balance portfolio, and as Ken mentioned, utilize our site in India to collect and to call into the U.K. So we'll see a shift in mix related to the type of portfolio that's being acquired. In the near term, we don't expect to see that much shift into litigation over time. It's something that we'll certainly explore, but nothing immediate there. Our plan is to look at the mix between agency and internal, and over time, shift work that we can, where we're not contractually obligated to have it with an agency to internal resources.

Okay. And my second question. Just on the overall supply, demand picture for paper, I mean, as you can see, the industry charge-offs have gone down considerably since the end of the recession. And so how is pricing looking or available supply? I realize that you pretty much were all pretty much tapped out this quarter for obvious reasons. But looking ahead, how do you see the supply demand shaping up over the next couple of quarters for just the regular organic type purchases in the U.S.?

I mean, I think you actually cemented or reaffirmed why we purchase assets, which was to take care of some of the ups and downs in the supply. What we're seeing here is the supply is a little bit uneven at this point. And mostly that's because issuers are getting their shops in order in order to sell. So I think it contracted a little bit in Q3, wasn't as much clearly as it was last year at this time. Pricing is still at the same level, maybe a touch elevated. Offsetting those 2 points are conversations that we've had with a lot of the issuers that say, at the end of the day, they're only selling to just a few players, 1, 2, maybe 3 players. And we seem to be one of those players. And so while the supply is a little uneven today, the purchase of Asset, Propel, Cabot, gives us different channels with different pools of capital to deploy in order to support our earnings growth.

Our next question comes from the line of David Scharf from JMP.

Actually, just a quick follow-up on the tax changes [ph]. Should we be looking at that 36%, 37% rate as soon as early next year?

As soon as the fourth quarter.

Sir, I'm showing no further questions in the queue. I'd now like to turn the call over to Ken Vecchione for further remarks.

Yes, thank you, all, for joining us. We're very pleased with the quarter. We're very excited. We've got a lot of momentum here, and we look forward to coming back and talking to you about the results of the company at the conclusion of Q4. So thank you, all, for participating today.

Thank you for calling, ladies and gentlemen. This does conclude your teleconference. You may all now disconnect. Everyone, have a wonderful day.