Encore Capital Group, Inc. (ECPG) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Announces Fourth Quarter and Full Year 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Adam Sragovicz. You may begin.

Thank you, Latoya. Good afternoon, and welcome to Encore Capital Group's fourth quarter and full year 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 full year of 2012 and the full year 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-K 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 agreement 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. We included information concerning adjusted operating expenses, excluding stock-based compensation expense, in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented. Once again, please be sure to see our Forms 10-K, 10-Q and other SEC filings, including a 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 for a more complete discussion of these factors and other risks. As a reminder, this conference call will also be made available for replay on the Investors section of our website, and we also plan to post the 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, Adam, and good afternoon, everyone. I appreciate you joining us for a discussion of Encore's fourth quarter and full year 2012 results. I'm pleased to report that 2012 was an exceptional year for Encore. We delivered strong financial results while making investments that we believe will strengthen our core business, provide long-term strategic advantages and position our company to succeed in an increasingly complex regulatory environment. Our strategies and deliberate and disciplined approach to portfolio underwriting and management again drove record earnings, record collections and record operating cash flow for both the fourth quarter and the full year. Of course, none of this would be possible without our more than 2,800 employees. I appreciate their daily commitment to our company and their willingness to help our consumers resolve their past financial obligations. To put our performance in a context, I'd like to take a step back and look at our progress over the past 3 years. In 2009, we recorded collections of $490 million. This year, we collected $950 million, nearly double the amount from just 3 years ago. We delivered these strong results, thanks to the deep insights we've developed into consumer behavior over the past decade. We are seeing similar results in our cost-to-collect. In 2009, our cost-to-collect was 47.6%. In 2012, our cost-to-collect was 40.4%, a decrease of 720 basis points. This meaningful reduction in cost-to-collect translates into a savings of almost $70 million or $1.60 in earnings for 2012 alone. These savings have been achieved through various operational strategies, including stopping collection efforts on accounts where we believe the consumer has unlimited ability to pay. The lower cost-to-collect has allowed us to develop our internal legal initiative, expand our operating site in Costa Rica and make the investments required to manage the changing regulatory and legislative environment. All of this adds up to earnings per fully diluted share from continuing operations of $3.04 in 2012. That's an increase of 125% over our 2009 earnings of $1.37. Clearly, our team has been executing the right strategies for the current environment and have built our success year after year. In addition to our outstanding front-line employees, I believe our performance also speaks to the strength and depth of our management team. We have hired leaders from world-class organizations and they have brought in best-in-class practices to all areas of Encore. Our full year purchases of $562 million were a 45% increase over 2011 and above the $500 million target that we discussed at our Investor Day. Concluded in the year's acquisition volumes were 2 large purchases from competitors, including 1 this quarter. Each of these purchases was a result of industry participants winding down their businesses, confirming our thesis of industry consolidation. For the quarter, we completed a total of 41 individual transactions from 11 unique sellers for a total of $154 million. We took advantage of a number of privately negotiated deals in both our core asset classes as well as the bankruptcy space, where we completed a large acquisition of a performing portfolio. Across the industry, pricing continued to be elevated and we saw that in the fourth quarter. That said, Encore is in the enviable position of having built the company by acquiring portfolios across the delinquency and product spectrum. With this depth of experience, we understand what prices are profitable and where to draw the line. In contrast, many of our competitors have a limited range of purchasing targets or lack the analytical sophistication to underwrite profitable portfolios. We will remain selective during this cyclical period of high, and in some cases, irrational pricing. Predicting the speed and scope of the industry consolidation is, of course, impossible. However, we are prepared, both operationally and financially, to take advantage of strategic opportunities to increase shareholder value as they emerge. Given the unpredictability of consolidation, our purchasing volumes may fluctuate from quarter-to-quarter. Our long-term goal to deploy enough capital across all asset classes, including tax lien transfers, to generate 15% to 20% earnings growth. As a testament to the advances in operations and analytics that we highlighted earlier, we are pleased to report some additional details on the large transaction that we completed in the second quarter. We have already collected 40% of the purchase price within the first 7 months of ownership, which is in line with our expectations. Our performance validates our conservative approach to valuation and our ability to manage extremely complex transactions. One of the other noteworthy accomplishments of 2012 was the acquisition of Propel. I'm pleased to report that the integration of the business is now complete. As part of the integration, we began deploying our legislative strategy and have enhanced the tax lien transfer origination process. Our focus now shifts to leveraging our combined strengths to drive the business forward and meaningfully increase originations in the early part of this year when the annual delinquent tax rolls are released. We believe that this is a real opportunity to help families and business owners, who need a flexible and affordable option to meet their property tax obligations. As proud as we are with our financial accomplishments, we are equally proud of the work we've done, to strengthen the industry and cultivate an innovative and engaging corporate culture. In keeping with our commitment in treating consumers fairly, as detailed in our Consumer Bill of Rights, Encore's Senior Vice President of Business Development, Amy Anuk, was instrumental in leading a cross-industry effort to create a certification program for members of the Debt Buyers Association. This certification will help ensure that industry participants operate with the highest ethical standards. Similarly, Ashish Masih, our Senior Vice President of Legal Collections, has taken a position on the board of the Debt Buyers Association, giving Encore yet another avenue for driving high standards in ethical behavior across the industry. Another important undertaking is Encore's consumer intelligence center of excellence, the Consumer Credit Research Institute, or CCRI. It is continuing to address important questions related to financial distress, credit behavior and consumer psychology. As many households continue to struggle, efforts to provide relief through policy and educational channels are hampered by a lack of information about subprime consumer behavior. The CCRI was designed to help address this, and we recently completed a first-of-its-kind study that compares prime and subprime consumers. This work was done in collaboration with scientists from UCLA. Our study found that subprime consumers, relative to prime consumers, are more likely to struggle with numeric and financial literacy concepts, misjudge their relative credit worthiness and place greater emphasis on short-term planning. These cognitive and behavioral differences are important and provide a unique means to which we can enhance our consumer interaction model and promote financial recovery. Additional information about this study and other work being conducted at the CCRI can be found at www.encoreccri.org. In December, we also announced an exclusive partnership with payoff.com, which uses goal-setting, rewards and other incentives to help consumers change their behaviors. This relationship will add to our understanding of financially-stressed consumers and enable us to better align and help with their recovery. Taken together, we believe that our efforts to drive higher standards throughout the industry and develop new insights into financially-stressed consumers position us well to engage and make a difference in the industry, regulatory and policy conversations. We are also excited to be recognized once again, along with companies such as Google and American Express, as one of India's 50 Best Places to Work by the Great Place to Work Institute. We are also named as one of Fortune's 100 Fastest-Growing Companies for the second year in a row, as well as one of San Diego's Healthiest Companies. Propel received the distinction of being one of the Top Workplaces by the San Antonio Express-News. We appreciate greatly that the importance we place on human capital strategy has been recognized by the marketplace, and more importantly, by our employees. Encore's annual retention rate for our call center employees across the globe is greater than 70%, which allows us to deliver a higher level of service to our consumers and ensure that our Consumer Bill of Rights remains at the forefront of every customer interaction. Finally, as you may be aware, the Federal Trade Commission recently issued a comprehensive study of our industry. We are pleased that the report highlighted the positive role that our industry plays in helping ensure that consumers have access to affordable credit. With that, I will turn it over to Paul, who will discuss our financial results in detail.

Thank you, Brandon. As Brandon discussed, we had a very strong fourth quarter and year in 2012. Collections in the fourth quarter reached a record high for our fourth quarter and continued investments in our operating platform give us confidence in our ability to expand upon the operating leverage created over the past few years. We generated earnings from continuing operations of $0.79 per fully diluted share during the quarter, an increase of 17% over the fourth quarter of 2011. For 2012, we generated earnings from continuing operations of $3.04 per fully diluted share, an increase of 29% over 2011. Adjusted EBITDA, which represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $135 million in the fourth quarter, an increase of 28% compared to the fourth quarter of 2011. Our overall cost-to-collect for the year decreased 180 basis points to 40.4%, down significantly from 42.2% in 2011. We achieved these results in 2012 even as we made investments to expand our internal legal channel and ramp up our operations center in Costa Rica. While cost-to-collect is an important metric, there are other related drivers of our success. One example is generating the greatest net return per dollar invested. We accomplished that by generating more gross dollars collected per investment dollar at what we believe to be the lowest cost per dollar collected in the industry. Over time, we expect our cost-to-collect to continually improve, but also expect it to fluctuate from quarter-to-quarter based on seasonality, the cost of investments in new operating initiatives and the ongoing management of the changing regulatory and legislative environment. Due primarily to the large purchasing volume and the strong performance of portfolios purchased over the last couple of years, our estimated remaining collections, or ERC, at December 31 increased by about $390 million over 2011 to approximately $2 billion. As we've discussed previously, we believe that our ERC, which reflects the estimated remaining value of our existing portfolios, is conservatively stated because of our cautious approach to setting initial curves and our practice of only increasing future expectations after a sustained period of overperformance. Fourth quarter collections were very strong at $230 million, up 24% from the fourth quarter of 2011. Our call centers contributed 45% of total collections, or $104 million, compared to $80 million. Direct cost per dollar collected in our call centers fell slightly to 7.2% in the fourth quarter from 7.3%. Legal channel collections grew to $113 million in the fourth quarter of 2012, compared to $96 million and accounted for 49% of total collections. Cost-to-collect in the legal channel was 40.4%, down from 41.4%. I'd like to reiterate that our long-stated preference to work with our consumers to negotiate a mutually accessible payment plan tailored to their personal financial situation. These plans almost always involve substantial discounts from what is owed. We not only believe that this is the right thing to do for our consumers, but the right thing to do for our business. When we do litigate, we pledge to be fair and reasonable throughout the process. Unfortunately, despite sincere efforts to reach consumers in a variety of ways, too many refuse engagement with us to resolve their financial obligations. Accordingly and as a last resort, we are often left only with the option of using legal means to recover debts that are owed. Finally, 6% of collections came from third-party collection agencies. In general, we expect collections from this channel to continue to decline as we shift more of our work to our internal call centers at a lower overall cost-to-collect. As a result of the large portfolio purchase we completed in the second quarter, we saw a temporary increase in third-party collections as many of those assets were already placed with third-party agencies at the time of acquisition. Because of our lower cost-to-collect and because we are able to ensure a consistently positive consumer experience, we will continue to shift much of this work to our internal call centers. Consistent with our stated practice and in keeping with our Consumer Bill of Rights, we had no portfolio sales in the quarter. Moving on, revenue from receivable portfolios was $140 million, an increase of 20% over the $116 million in the fourth quarter of 2011. As a percentage of collections and excluding the effects of allowances, our revenue recognition rate was 59.4%, compared to 64.1% in the fourth quarter of 2011. Our revenue recognition rate is attributable to our cautious approach when setting initial IRRs and our policy of increasing them gradually after periods of overperformance. For example, as a result of sustained overperformance, we have slowly increased the multiples on the 2009, '10 and '11 vintages to 2.9, 2.8 and 2.4x, respectively, up from their initial levels of 2.4, 2.2 and 2x, respectively. For the quarter, we had $2.7 million in net allowance reversals compared to $2.7 million of allowance charges in the fourth quarter of 2011. Looking at the breakdown by year, we had $914,000 of allowance reversals in the 2005 vintage, $252,000 in the 2007 vintage, $2 million in the 2008 vintage and $759,000 in ZBA allowance reversals. These were partially offset by allowances of $1.3 million in the 2006 vintage. We had no allowance charges for the 2009, '10, '11 or '12 vintages, as has been the case since we acquired these portfolios. As many of you know, we account for the business on a quarterly pool basis rather than overall. When pools underperform, we take allowance charges, which are reflected as an immediate reduction in revenue. We measure underperformance against the current yield that is assigned to a pool, not its original expectation. This pool-by-pool accounting treatment leads inevitably to noncash allowance charges in certain periods, even when we are overperforming a pool's initial expectations. In contrast, when pools overperform, that overperformance is not reflected immediately. Once we have evidence of sustained overperformance in the pool, we will increase that pool's yield. Unlike allowance charges, which are realized immediately, this increased yield will be reflected as increased revenue during the current and the future quarters. Consistent with this practice and as a result of continued overperformance, primarily in the 2009, '10 and '11 vintages, we increased yields in those pool groups this quarter. Shifting now to expenses. Our total operating expenses for the fourth quarter, excluding Propel, were $102 million, up from $84 million in the fourth quarter of 2011. Included in operating expenses for the fourth quarter of 2012 were stock-based compensation charges of approximately $2.1 million compared to $1.7 million in the fourth quarter of 2011. One of our key financing milestones at Encore in 2012 was the issuance of $115 million in the convertible debt for a 5-year term with a 3% coupon. This additional capital will allow us to take advantage of accelerating industry consolidation and keep our competitive cost of capital edge. However, it is important to mention that while the accounting for our business is complicated, the accounting for convertible bonds can be even more complicated. We have a 3% coupon on our convertible debt, which reflects the cash costs of this debt. However, in our financial statements, we will show an interest rate of 6% or the amount that is estimated to be our cost of straight debt. The noncash difference is not insignificant, about $3.5 million or $0.09 per share per year. This difference is a noncash charge and so, going forward, to give a more accurate picture of the cash position of our business, we will add the presentation of cash EPS to back out these noncash charges. Earlier today, we posted a presentation to the Investors section of our website to more fully explain some of the accounting nuances of our convertible bonds. Including the convertible debt, we ended the quarter with $706 million in total debt. Our leverage ratio was 1.25x in the fourth quarter, down from a high of 1.46x in the second quarter. At the end of the fourth quarter, we had approximately $190 million of available borrowing capacity. Before we open up the line for your questions, Brandon has a few final remarks.

Looking back at 2012, it's clear that our team has a lot to be proud of. We posted strong financial and operational results, made key investments designed to drive performance in the coming years and funded initiatives that should help our consumers get back on the path towards financial freedom. Our strength in analytics and disciplined approach to deploying capital continue to be competitive advantages for the company, advantages that are increasingly important during a time of industry consolidation and elevated pricing. Finally, our strong capital foundation and creative, responsible approach to problem solving positions us well for 2013 and beyond. We would like to close by once again thanking Encore's employees worldwide for their continued commitment to our success. I'm gratified by the work that we do to help consumers resolve their outstanding debts flexibly and affordably. With that, we'll open up the call to questions.

[Operator Instructions] The first question is from David Scharf from JMP Securities.

Brandon, first off, just a general kind of macro question, can you provide any commentary whether or not now that we're sort of 6 weeks into the new year, whether you're noticing any improvements in the overall liquidation environment for consumers and in particular, whether these first few weeks you've been able to discern whether the payroll tax increases had any impact on collections?

Dave, we've often say that we don't think that our collectors are impacted all that much by the macro economy. If you go back to the data we've presented for the last few years, payment behavior has been largely consistent. So I haven't taken a look at it specifically in the first 6 weeks, but I can tell you that there's unlikely to be any material shift in collections related to seasonality or anything else that would impact our consumers. We're seeing performance in line with our expectations.

Got it. Shifting to sort of purchasing in the quarter, how should we think about the Chapter 13 paper? I mean is this a kind of a one-off unique opportunity? Or is this an asset class you feel you have a lot more capacity down the road to service?

Well I think it's both. It's an asset class that we've talked about for the last few years and we've often said that we wouldn't invest in it unless we found the right opportunity, and we think looking at performing pools is a better investment than when you're buying them or just being filed. So we had a very large portfolio of bankruptcy that we manage for our own account and we bought a meaningful amount over the last few years. We think it's an asset class. You'll see some more buying this year, but this particular deal is an opportunistic one, and one that we expect to see in companies like the one we worked with, where people struggle with the financing and the liquidation environment in companies like Encore to take advantage of it.

Okay. And did I hear you say these are primarily performing BKs?

They are.

Okay. And does the expectation of yield, did that color any of the change in kind of the monthly IRR at the end of the year? It looked like it was down on the 2012 vintages from what we saw at the end of September?

I think what you continue to see is as we put new portfolio on, we continue to be conservative and you likely just saw that impact.

Got it. And just one last question and then I'll get back in queue. You put a lot of capital to use obviously in the quarter so that one of your obviously other public competitor, your commentary on elevated pricing seem to be as cautious as it was on the Q3 call. Can you just give us a little backdrop on whether anything on the supply landscape has changed in the new year in terms of either more players consolidating and liquidating or whether any sellers have reentered the market?

So on the supply front, we see continued series of discussions with other competitors, generally, the small or midsized competitors who are struggling, and that's continued now for a while. Your commentary is really around the auction environment directly from the issuer, which the issuers which is very competitive especially probably highest in the fresh space. But it will cost all the different stage of delinquency we're seeing increased pricing. We haven't seen much change in or out of supply, as it relates to the issuers. We just think that there are at times people who are overspending themselves to some extent and likely will find themselves in trouble at some point in the future.

The next question is from Hugh Miller of Sidoti & Company. Hugh M. Miller - Sidoti & Company, LLC: I had, I guess, a question about the tax return season. I mean I realized that it's starting a little later than normal this year and that's a significant source of your cash collections in the quarter. Do you guys anticipate that's going to have any meaningful influence in 1Q collections? Or is it likely to kind of be caught back up throughout the rest -- the remainder of the quarter?

We're not expecting to see a material difference as a result of the delay. Hugh M. Miller - Sidoti & Company, LLC: Okay. And I guess, looking at the regulatory environment, given the recent ruling about recess appointments. Can you just talk about the regulatory landscape and how you think that influences kind of things with the CFPB and your competitors and whether or not they're going to still continue to look to exit the business?

Well, we have -- for the past few years, we continue to expect the CFPB to make their way around the collection industry in 2013. It's my belief nothing has changed in that respect. And so that presence will be there. We think that will -- others will look to that presence and it will be one of the factors they will use to make a decision to be in the business. I think the driving force, besides the regulatory environment, is just the ability to get attractively priced capital and then collect at a rate you need to be profitable with a lower operating cost. And the regulatory environment is sort of maybe the straw that breaks the camel's back. But ultimately, these companies that are in the space are struggling financially and that's the bigger issue. Hugh M. Miller - Sidoti & Company, LLC: Okay. Thanks for the color there. Was just looking also at the legal channel cost-to-collect. It looked like it trended up in the second half of the year, relative to the first and I was wondering if you could provide any insight as to what might be driving that now? How should we be thinking about that as we head into 2013?

So the overall cost-to-collect in the legal channel here is going to be dependent on the volume of cases that are filed at any given period, and that can fluctuate from quarter-to-quarter. So the variable cost associated with the legal channel has been consistent throughout the year. But depending upon the timing and volume of accounts placed in that channel, it can shift from quarter-to-quarter. So it's really just a quarterly timing thing. It doesn't change the overall cost-to-collect of that business. Hugh M. Miller - Sidoti & Company, LLC: Got you, okay. And can you remind us again about when the tax lien list should be coming out for the Propel business, Texas?

So the county started producing them as we speak. Between now and the end of February, we should receive all the county's delinquent tax rolls. Hugh M. Miller - Sidoti & Company, LLC: Okay. And are you getting any insight right now as to how things are looking relative to your expectations when you acquired the business from a capital allocation standpoint?

Sitting here today, we think while we thought we bought is exactly what's going to happen this year. 2013 was always going to be the year where our innovations and partnerships would drive results and we think we're very well positioned to get that done. That obviously remains to be seen, but there's nothing to suggest. We won't have a big first half of the year.

The next question is from Mark Hughes of SunTrust.

Brandon, what do you think of that SEC report? You mentioned it in your prepared remarks, but any further thoughts about that whether you thought it was good, bad? What do you think?

I felt like it was balanced. For once, we got a report that I think looked at the totality of the industry and it took obviously a long time to draw some conclusions. But I think it highlights that, back in 2008, they gathered some data that suggests that there are changes that needed to be made in the industry and, quite frankly, I think a lot of them have the contracts that are signed today. The access to documentation are really night and day from almost 2008 until today. Does that mean the industry can't get better? No. Of course, we can get better. But I think on balance, it felt like a fair representation of the industry and as I said in the remarks, I think the acknowledgment that we play a vital part in the credit cycle is an important piece of that.

What do you think of their point about too many people being targeted erroneously? Did you think their numbers were on the mark?

The problem is we can't see all the data. What I can tell you is that does not happen here. There are very few instances where we end up contacting the wrong person. The banks have gotten really good at working through issues of identity theft or issues of mistaken identity and rarely do we get information where we're not actually contacting the person who owes the debt.

How about on the tax lien business, any new legislative initiatives that are worth talking about?

There's a lot going on, but none that I would bring up at this point.

And then the trend in pricing if we look between 3Q and 4Q, you say pricing continues to be elevated. Did it move up during 4Q?

It did.

And would you like to characterize, throw an adjective with that?

Probably, the adjective is it didn't spike up, but it continues to trend up. Those -- I'd use that word. You would see the drifting upward continues to happen, but there wasn't some step function change.

The next question is from Sameer Gokhale of Janney Cap.

I guess, the first question was in terms of Propel. I think last quarter, you'd said it was $1.4 million of net income. I haven't dug through the 10-K, but just from what I could see, it seemed like it was below that. Am I looking at the right numbers in terms of the comparisons? Like what was the comparable number to the $1.4 million from Q3? What was that in Q4?

So in Q3, it contributed about $0.06. In Q4, it contributed about $0.05. And that's typical just seasonality of the business. The portfolio grows early on in the year and then reduces later in the year with payments, with principal payments. So that's just part of the typical seasonality of the business.

Okay, okay. I just want to make sure I was looking at the right stuff, okay. And then in terms of the other operating expenses, I don't know if you addressed this. Maybe I missed it, but the sequential decline in other OpEx, what was that attributable to, also seasonality or is there something else going on there like going from $14.8 million to $10.1 million?

A lot of that has to do with the -- what's purchased in the quarter. In other operating expenses are things like mail campaigns and those types of costs. So depending upon where we are at different points in time during the year, it will have an impact on that level, the level of operating expenses in any quarter. So that's what's largely driving it. So impact of volumes of purchases and what we're doing in one period versus another.

Okay. And then in the fourth quarter, did you say your total purchases, like what percentage of that was made up of BK purchases?

So in the fourth quarter, $83.5 million was BK.

Was bankruptcy, okay. Terrific, that's helpful. And then I guess this -- the other question was we've been expecting this consolidation to happen in the industry and that's kind of our thesis as well, but the companies that are selling their portfolios like there's a one in Q2. But as you talked to other folks who also selling you portfolios as you're hearing about things, are these companies that are just shutting up shop and moving onto some other business? Or are they just temporarily waiting for the pricing environment to improve and then at some point, if prices come down, then they step back in? How do you characterize that from the standpoint of a competitive environment?

I guess some of that's unknown. I think our belief is the wind-down is permanent. But it doesn't mean if pricing changes, you won't come back in. But we're not expecting them to come back in, in the near term.

Okay, with the guys that have sold you their portfolios or maybe others you've heard about, are those the specific instances where the companies have just shut down completely? Or are those instances where people have just temporarily just sold the portfolio and got the cash and then will revisit maybe at some point?

Probably, a little bit of both.

Okay, okay. And then just my last question, the convertible bonds. Paul, can you just remind us, you talked a little bit about the noncash impact on the earnings in the presentation that you'll provide going forward in the revised format? But the -- was -- so the debt is accounted for at a discount to par, is that right? Now the accretion occurs, that accretion is the additional interest expense that partially that close to the income statement? Is that the way to think about it?

That's exactly right.

Okay. And how much was the discount on your balance sheet on the debt?

It's about $14 million or so. There is a presentation that we filed today which walks through all of the mechanics and shows the discount and how the discount was calculated and how the accretion will work by year over time. So all the numbers that you and others will need for your modeling, we put out in the presentation today.

The next question is from Bob Napoli of William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Just a question first of all on the productivity and outlook for productivity improvement. You guys have obviously been able to drive down your cost pretty substantially over the past few years, and how much left is there? I mean are we -- is it getting much more difficult to get further reductions or improvements, I mean, out of India? And you guys have done a great job there with that as are you seeing incrementally is it -- are you most of the way through those improvements that you're -- the cost reductions? Or is there still a lot more to get?

There's still a lot more to get. Part of the improvement that happened in 2012 were offset by investments we made there. We actually had further reduction in operating cost-to-collect, but that was offset by both management and regulatory environment, both legal expenses and settlements. But then also the investment in internal legal at Costa Rica and building up our compliance infrastructure in anticipation of the CFPB. So in our cost-to-collect, you've got a lot of new dollars coming in and a lot of savings. That's a net to a decrease. All that said, I wouldn't expect it to be a huge change our cost-to-collect in the next year. So I think you'll see the same trend, more collections at a lower cost, but offset by investments we need to make to put in place everything we think needs to be in place in the new regulatory environment. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Have you -- has the CFPB, and I apologize if you said this. I missed some of your opening comments. With this, do you have your audit schedule with the CFPB?

If we did, I'm not sure I could tell you. But what I would say is we expect that they're going to show up at some point this year. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. All right. And then as far as the competitive environment and the gradually higher pricing, are you seeing -- have you seen a reduction in the number of sellers or much of a reduction in the number -- I'm sorry, in the number of competitors, buyers?

What we've seen is some of the sellers have proactively quote their list of people they would sell to. So there may be people out there who still have capital who don't have access to buy portfolio. We've seen a huge increase in the number of audits we've had to go through as a company. The banks have taken very seriously the third-party oversight mandate by the CFPB and are going out visiting all the people that they want to do business with. And so whether the change that we see is we see the sellers restricting the universe of people that they will sell to. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. But you haven't seen -- I mean, I guess there's been a little bit of -- you bought the portfolio, the bankruptcy portfolio you bought, was that essentially a competitor getting out of the business?

It was the inventory of a competitor. That's correct. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. I mean so the -- and you also bought a competitor earlier in the year.

Yes. So we think net-net demand is retreating to some extent, but at the same time, you've got companies like ours and PRA that are expanding their access to credit. So I don't -- I know net-net if the demand is down. I just think the number of people that sellers will sell to is decreasing. Robert P. Napoli - William Blair & Company L.L.C., Research Division: How about the number of sellers? I guess I think some big sellers made, I guess -- it's been suggested that some big sellers have not come back into the market, I'm not -- after pulling back in the third quarter. Is that true? Or are you seeing -- have you seen pretty much the main sellers come back into the market?

We checked, over the last couple of years, there have been -- there've always been times that one of the big sellers wasn't selling for whatever reason. And so today, there are big sellers who aren't selling, and a year ago, there are big sellers who weren't selling. What I will say is that all of the large banks are being very cautious about what they sell and who they sell it to, which sometimes delays what's going to be in the marketplace. But anyway, I think there's always a number of sellers who are on the sidelines for whatever reason. They don't need to sell. They're worried about the regulatory environment and we see that pattern constantly. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And then on your share buybacks, should we expect more share buyback at this point? Or given the fact that there could be some consolidation this year, would it be more likely you're going to keep your powder dry for potential large opportunities?

Right now, we've basically spent what was approved and authorized by the board to spend and there's no new buyback that's in place at this point in time. And so right now, we're focused on capitalizing on the opportunities we see in the market and the board could authorize at some point in the future, but right now, there's no authorization in place. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Last question on the M&A front. Is there -- are you actively looking at M&A opportunities? And do you have interest -- besides the U.S., do you have interest internationally, increasing interest? I know you've always had interest.

Yes, we are -- yes, I think we've been in a continual dialogue with opportunities outside the U.S. and that continues today as it's been for the last period of time. And we believe it's a necessary part of our diversification path. But we're going to wait for the right thing to come up at the right time. But there are active discussions going on all the time. Robert P. Napoli - William Blair & Company L.L.C., Research Division: And domestically? I mean Propel was kind of a diversification effort. Are you looking at other diversification?

We are.

The next question is from Sameer Gokhale of Janney Cap.

I just had a follow-up on cloud computing and your investments in the cloud infrastructure and I read something, which was saying that you want to support like a self-service customer website and then have their analytics there. It seems like the person in charge of those, given a budget of around $25 million or so in that business, I mean, what are your expectations from that? Is that -- it still sounds like it's in the very early stages of your work there, but is that expected to result in some real productivity improvements or is that just you think incremental? I mean how should we think about that?

Well, one day, we hired an incredibly talented CIO, who managed to get the first positive article of that collector in the Wall Street Journal. So I give him a lot of credit for that. And that being said, I think that it's our belief that we are increasingly in an age where consumers want to conduct their business in an online fashion or not have to go through the collection process of going through a phone call with somebody. And the functionality to do that requires a significant investment. But what we believe will happen over time is a reduction in cost-to-collect as the dollars collected through the channel will cost us, other than the investment in technology, 0. So it's one of the ways to -- Bob's question earlier that we think we can meaningfully impact the cost structure, but we're in the early innings of that. So I wouldn't start baking that in, but we're spending a lot of time thinking about it and designing the infrastructure for the future.

And the $25 million, Sameer, relates to all of IT spending across the organization, not to this initiative.

There are no further questions on queue. At this time, I'll turn the call back over to management for closing remarks.

Thank you very much. We appreciate your time today.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.