Encore Capital Group, Inc. (ECPG) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Encore Capital Group’s Q2 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Bruce Thomas, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group’s Second Quarter 2017 Earnings Call. With me on the call today are Ashish Masih, our President and Chief Executive Officer; and Jonathan Clark, Executive Vice President and Chief Financial Officer. Ashish and Jon will make prepared remarks today, and then we’ll be happy to take your questions. Paul Grinberg, President of Encore’s International Business, will also be joining us remotely for the question-and-answer session. Before we begin, we have a few items to note. Unless otherwise specified, all comparisons made on this conference call will be between the second quarter of 2017 and the second quarter of 2016. 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 and uncertainties. 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 on our earnings presentation 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 Ashish Masih, our President and Chief Executive Officer.

Good afternoon, and welcome to our second quarter earnings call. I have been looking forward to this call which is my first since taking over as CEO of Encore. Having spent much of the last 8 years leading Encore’s domestic business, I have an appreciation for the depth and breadth of our industry expertise, our relationship with issuers and the collaborative environment in which we work everyday. As I reflect on our business, I’d like to highlight a number of key attributes that have contributed to our success and will allow us to maintain a leadership position in the global debt purchasing and recovery industry. First, our extensive investment in data analytics and behavioral science form the foundation of our ability to predict collections performance and drive our pricing accuracy for portfolio purchases. Second, our global operating platform allows us to innovate and refine our collection strategies in order to improve portfolio liquidations. Third, our operational scale and cost leadership drive strong profitability and investment returns. Fourth, proven ability to access capital positions us well to benefit from favorable market conditions in the U.S. and other parts of the world. And finally, our relentless focus on risk management and regulatory compliance has become a competitive advantage for Encore. My transition into the Chief Executive role has gone smoothly due to the healthy state of Encore and our industry as well as our continued focus on a well-established strategic direction. I would like to begin today’s call by discussing industry dynamics and Encore’s second quarter results. We delivered a solid quarter of financial and operational performance. U.S. investment returns continue to improve as a result of the domestic pricing and supply environment, coupled with our steady progress on liquidation improvement initiatives. In Europe, deployments were strong in the second quarter and our international business delivered strong earnings as a result of improved collections. Let’s now turn to a review of Encore’s domestic business. In the second quarter, the U.S. market continued to exhibit favorable purchasing dynamics. Recent financial results from large credit card issuers indicate that delinquency and net charge-off rates continue to rise, while loan loss provisions continue to build, suggesting a continuation of the increases in supply we have been reporting for the last several quarters. Pricing in the second quarter remained favorable and we continue to stay committed to our disciplined pricing strategy. Domestic deployments for the charged-off credit cards in Q2 were up slightly compared to the same period a year ago. However, the combination of better pricing and our liquidation improvement program has generated significantly more estimated remaining collections or ERC for these purchases compared to purchases in the same period a year ago. This dynamic will lead to stronger profitability in the future. While the market can benefit from decreased pricing, we believe our focus in driving liquidation improvements uniquely positions us to leverage these positive market conditions. Expected returns associated with the new deployments are up substantially compared to last year. Our core U.S. money multiple year-to-date through the end of Q2 was 2.0 which compares favorably to the 1.8 multiple from a year ago. Through our successful portfolio purchases, including forward flow arrangements, we are well positioned for a strong year of deployments at substantially better returns, having already secured more than $425 million of commitments by the end of the second quarter. As you may remember, the CFPB issued its advance notice of proposed rulemaking back in November of 2013, to which Encore submitted comments. Although this process has taken a long time, the CFPB has now announced that it will take the next step by issuing the notice of proposed rulemaking in September. These rules which could become effective sometime in 2018 are expected to address debt collectors and debt buyers, communications practices as well as consumer disclosures. As we have said before, if you view the finalization of new rules for our industry to be a positive step for all market participants who are capable of and willing to invest in robust, compliant operations. As we have said in the past, as our purchasing dollar becomes more efficient, we purchase more accounts and can expect related expenses to follow. Similar to prior quarters, a portion of our capital deployment in Q2 was dedicated to purchasing portfolios containing more accounts per dollar deployed when compared to prior years. These portfolios with their higher account volumes generate increased near-term expenses from account manager hiring, legal placements and letter volumes. They also generate strong returns. We understand this dynamic well and are willing to absorb this near-term expense in order to drive higher IRRs and more favorable long-term results. Spending on these initiatives in Q2 took place according to our plan and our collections capacity growth remains on track. We continue to buy predominantly fresh paper and we believe that the majority of market supply will consist of fresh paper for the foreseeable future. Our recent capacity expansion is tailored toward providing consumer-centric account servicing which we believe leads to better long-term returns, particularly for fresh accounts. We have been able to add capacity quickly which is a good example of Encore’s ability to rapidly and efficiently adapt to changes in market conditions. As a result, we remain in excellent position to capitalize on favorable purchasing conditions in the U.S. Let’s now turn our focus to our international business. Cabot deployed over $90 million in Q2, reflecting a particularly strong purchasing quarter in Europe. Similar to a program implemented in the U.S. a couple of years ago, Cabot began a program to increase liquidations through a series of operational, technological and analytical initiatives. We are seeing solid improvements in collections as a result of these initiatives. These improvements, combined with the success of several cost-efficiency programs, enable us to continue to deploy capital in a competitive market at strong risk-adjusted returns. Our Q2 results reflect improved collections driven by this program and our models indicate that this trend will continue in the future. Accordingly, this quarter, we felt very confident in diverting a portion of the allowance charge that we took last year related to our European business. This trend of sustained improvement in collections also supported increased ERC expectations for other European portfolios, leading to increases in IRRs and revenue across several pool groups. In March 2016, Cabot became the first large credit management service company in the U.K. to be authorized by the FCA. And in May 2017, Cabot became the first credit management service company to be authorized by the Central Bank of Ireland, reaffirming Cabot’s leadership in regulatory compliance. As we have previously mentioned, JC Flowers and Encore have begun a process that could result in the public offering of Cabot on the London Stock Exchange as early as Q4 of this year. The process remains on track and as we have stated in the past, our ability to provide updates about any IPO or similar activity at Cabot is limited by securities laws. Our consolidated debt-to-equity ratio at June 30 was 4.9. Considering this ratio without Cabot, our debt-to-equity ratio was 2.3 which is less than half of the consolidated ratio. It is important to remember that we fully consolidate Cabot’s debt on our balance sheet because we have 43% economic interest in Cabot and we control their board. However, Cabot’s debt has no recourse to Encore. It is clear from this illustration that Encore is far less levered than our financials would indicate. Upon consummation of the Cabot IPO, we intend to deconsolidate Cabot from our financial statements. The potential deconsolidation would significantly change our financial statements. For example, assets and liabilities attributable to Cabot would be removed and the fair value of our retained interest in Cabot would be accounted for under equity method accounting. We believe this will make it much easier for investors to understand Encore’s true financial condition. I’d now like to turn the call over to Jon for a more detailed look at our Q2 financial results.

Thank you, Ashish. Before I go into our financial results in detail, I’d like to remind you that as required by U.S. GAAP, we are showing 100% of the results for Cabot, Grove, Refinancia and Baycorp in our financial statements. Where indicated, we will adjust the numbers to account for noncontrolling interest. Turning to Encore’s results in the second quarter. Encore earned GAAP net income from continuing operations of $20 million or $0.77 per share. Adjusted income was $23 million or $0.88 per share. We earned through a $0.03 foreign currency exchange headwind in the second quarter. Cash collections in the quarter were $446 million and our ERC at June 30 was $6.3 billion, a new all-time high for our business. Deployments totaled $246 million in the second quarter, up 6% compared to the $233 million of purchases we made in the same quarter a year ago. In The United States, the majority of our $132 million of deployment represented fresh, charged-off credit card debt. This compares to our domestic deployment of $129 million a year ago which was also a strong quarter. European deployments totaled $92 million with the majority attributed to portfolio purchases in the U.K. at solid returns. This compares favorably to a year ago when we deployed $86 million. Our liquidation improvement programs have allowed us to more than offset the competitive market dynamics in certain European markets to earn better returns than a year ago. During the second quarter, we also deployed $22 million in other geographies, including Australia and Columbia compared to $18 million of purchases a year ago. Worldwide collections were $446 million in the second quarter compared to $434 million a year ago. In constant currency terms, collections grew 6% in the quarter. Encore’s collections in our U.S. call centers grew 5% in Q2 compared to last year, as we leveraged our increased call center capacity. Our call centers continue to represent our preferred channel of collections. Keep in mind that as our call center capacity grows, we’re able to deploy more capital at favorable returns. The delays we had been experiencing in domestic legal collections were eliminated before the second quarter began, and we are now operating efficiently at a more typical legal collections run rate. Worldwide revenue in the second quarter was $291 million compared to $289 million a year ago. In constant currency, revenue was $302 million in the second quarter which was up 4% compared to the prior year. Domestic revenues were up 5% compared to the same quarter last year. Q2 revenue in Europe was down due to currency effects and the trailing impact of the allowance charge taken in the third quarter of last year. During the quarter, we recorded $2 million of domestic net portfolio allowance reversals. As Ashish mentioned, we recorded $8 million of net portfolio allowance reversals in Europe as a result of the increases in collections driven by our liquidation improvement initiatives. We also recorded a small allowance charge of approximately $680,000 on our portfolio in Latin America. In the second quarter, we increased domestic yields, primarily in pools in the 2011 through 2016 vintages as a result of sustained overperformance. In Europe, we increased yields on certain pool groups in the 2013 through 2016 vintages, also as a result of sustainable overperformance and expectations of strong collections in the future. Encore generated $39 million of zero-basis revenue in Q2 compared to $32 million in the same period a year ago. Our ERC at June 30 was $6.3 billion, up $719 million, representing an increase of 13% compared to the end of the second quarter of 2016. In the second quarter, our higher purchase price multiple reflects more ERC per dollar deployed than a year ago. In Q2, we spent 4% more for charged-off U.S. credit card portfolios but generated 22% more ERC than a year ago. In the second quarter, we recorded GAAP earnings from continuing operations of $0.77 per share. And reconciling our GAAP earnings to our adjusted earnings, adjustments totaled $0.17 per share. After applying the income tax effect of the adjustments and adjusting for noncontrolling interest, we ended up with $0.87 per fully diluted share, and our non-GAAP economic EPS was $0.88. With that, I’d like to turn it back over to Ashish

Thanks, Jon. As I reflect on our performance in the quarter, I’m excited about the opportunities that lie ahead. We continue to observe positive trends in the supply and pricing in the U.S., our largest market. We are well positioned to benefit from these market conditions and are working diligently to maximize our returns. To summarize, we delivered a solid quarter of financial and operational performance. Market supply in the U.S. continues to grow, driving continued favorable pricing. These market conditions, along with our improving liquidation rates, are enabling us to book core business with money multiples at 2.0. From a deployment perspective in the U.S., we have secured more than $425 million in commitments for 2017. Cabot had a strong purchasing quarter in Europe and its liquidation improvement initiatives are producing sustained, improved collections across many different pool groups. Preparation for a Cabot IPO remains on track. Now, we’d be happy to answer any questions that you may have. Operator, please open up the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Mark Hughes of SunTrust. Your line is now open.

Yes, thank you. Good afternoon.

Hi, Mark.

What was the impact of Cabot in the quarter? It looks like the net effect attributable to noncontrolling interest was a loss. Was it diluted in the quarter?

No. Cabot earned $0.27 for the quarter.

And the issue of the net loss, kind of the add back below the line despite the fact that they were profitable.

Yes, they’re still – even though our – this is Jon, Mark – even though our overall effective tax rate improved, you have to remember there’s still the nondeductability of interest at Cabot. So when you compare Q2 this year to Q2 last year, that’s a big part of the driver there. There are a number of things, factors that play in there, but that’s one of the bigger ones.

And the $0.27 includes the benefit of the $8 million reversal in Europe, is that right?

Yes.

The collections cost, could you kind of break out – you gave us the detail by category but then you do the reconciliation near the end of the release, if you do it on an adjusted basis, just looking at the collections. As I look at it, it looks like collections cost, up about 340 basis points relative to collections in total, and I see some of that in the legal costs. What else was up in the quarter when we think about it in those terms?

So Mark, this is Ashish. Thanks for your question. So the cost expenses and the cost to collect increases, I would say, 3 reasons. The first is, we have increased placements into the legal channel. As I have mentioned before that we’re buying more accounts per dollar deployed, and that’s increasing the volume of placements. The second factor is, we’ve also mentioned previously, investing in additional call center capacity across all our geographies and call centers. So that’s getting factored in as well. And then finally, any comparison to the quarter a year ago is further skewed because we had reduced legal placements in 2016 caused by the documentation delays that we were facing associated with the CFPB consent decree. So those are the 3 main factors when you look at expenses for the quarter from a year ago versus the recent one.

A question on the balance sheet, the – it looks like redeemable noncontrolling interest is up pretty meaningfully on a sequential basis while additional paid in capital is down about the same amount. Is that – is there something driving that movement in the balance sheet?

Yes, Mark. And you put your fingers on all of them, they are all related. But the movement in the balance sheet is caused by a fair value adjustment for redeemable noncontrolling interest that we booked for JC Flowers. Because you remember, we carried that on our balance sheet as part of our accounting. And as that value was increased which it was increased this quarter, as you pointed out. By definition, balance sheets have to balance. So the way the accounting works is if the redeemable noncontrolling interest goes up, then it comes out of retained earnings and additional paid in capital, and it’s a – upon the consummation of an IPO and deconsolidation of Cabot, this will all go away. But for now, this is the accounting that we have to adhere to. I will tell you that at least the way I look at it, Mark, is that we’re effectively booking half the trade. We’re marking JC Flowers’ value if you will, but we’re not marking ours. So as a result, what happens is, as I said before, it becomes some gain that’s got to come out of somewhere. So it’s all good news but it ends up in a reduction in equity.

Great, thank you.

Thank you. Our next question comes from the line of Bose George of KBW. Your line is now open.

Hey, good afternoon. I just wanted to confirm your commentary on the pricing. Just quarter-over-quarter, was that roughly stable, the multiple at peak times?

Hi Bose, this is Ashish. So if I heard you correctly your question is on pricing trend from a year ago. So the multiple that we booked this quarter for our core credit card receivables in the U.S. was 2x, 2.0. And that’s higher than the 1.8 that we booked a year ago. So that is a reflection of two things: pricing as well as improvements in liquidation, because the multiple is the expected remaining collections divided by the price paid.

And then also just a question on first quarter. Was that 2.0, was that the first quarter number as well?

That is correct.

On one of the earnings call from the card companies, when the management teams noted that they believe that recoveries are now higher in-house versus the mark – selling it into the market. I’m just curious to get your thoughts on that since that’s presumably kind of the debate that you have now with a lot of your sellers. So just curious of your thoughts on that commentary.

Yes, it’s a great question, Bose. We listen to all the calls as well and of course, as you would imagine, we meet the dollar issuer partners and have great relationships with them. So we have been hearing, at least on the calls, some of those comments as well. Now I’m not sure recoveries are certainly becoming higher internally or not. Issuers tend to have both channels. The ones who sell, they always keep some in-house and in-house means perhaps, internal operations but more likely, agencies. So they keep those volumes going through both channels. We believe we are very competitive and we have good partnerships and we are able to close any price gaps that might be there to book volumes and purchases for the long-term where we can earn a good return, solid return and it makes sense from their point of view as well from an economic point of view. So we also see these volumes increasing overall for the industry and for these issuers. So while they may be able to keep some more in-house, overall volumes are increasing and that provides enough supply increase for the debt buying industry and for us, of course.

Great. Thanks a lot.

Thanks, Bose.

Thank you. Our next question comes from the line of John Rowan of Janney. Your line is now open.

Good afternoon guys. Just to confirm, it was an $8 million reversal in Europe. Did I hear you right, you said there was also a $2 million reversal in the U.S. which will obviously lead into a $10 million revenue contribution?

Correct.

And then just one other quick question. There is a relatively big jump in other income and [indiscernible] like $600,000 or $2.5 million. Can just give us some type of clarity on what that was and kind of the ongoing run rate there?

I’m sorry, you’re talking about the...

Other revenue...

Let’s see, all right. [indiscernible] what you’re talking about.

Well, it’s other income, sorry. So low interest expense, other income of $2.5 million?

Yes, just a bit lower than the year before. There’s not a whole lot going on there year-on-year, right.

Yes, I know. Year-over-year is a little bit lower, but it’s higher than the first quarter, so I’m just wondering if there was anything unusual in that item.

No, the one thing that you – you’re going to get – always get a little bit of noise in there, John. I wouldn’t get too caught up in it. This time, the Q-on-Q is not that material but as we’ve talked about in the past, there is that hedge that they have in Cabot between the euro and the pound. So that’s flows through this line. So depending on where it is year-on-year, you’re going to get a tiny bit of noise there, or a lot this year is this core – this comparison to 2016 to 2017 is de minimis, right?

Okay, and can you remind me where we stand with any change to the FDCPA?

John, this is Ashish. So FDCPA is still the law that governs the debt collection industry. No changes have happened to that and I haven’t heard of anything in play. Now that said...

Sorry, I was getting my acronyms mashed up, the TCPA.

Ah, okay.

Sorry.

The TCPA is still the law of the land. There has been some talk of revising it perhaps, but nothing material has happened. There is a change in leadership at the FCC that continues to happen. And as that happens, perhaps there will be definitive provisions or some rules and guidelines that may come that may help our industry, but nothing has happened yet. And I haven’t heard of any specific change to the TCPA itself, at least in the recent past.

All right, Thank you very much.

You’re welcome.

Thank you. Our next question comes from the line of Brian Hogan of William Blair. Your line is now open.

Good day. A question on Europe and your deployment there. Previous quarters, you decided to increase the competitive environment and maybe didn’t make sense and you stepped up deployment there. What gives you the confidence to deploy as much capital that you did in Europe today?

So I’ll jump in with a couple of points and then Paul Grinberg is on the phone line, not with me, so there be a little delay, but I’ll throw it to him after that, he is traveling. So in Europe, in Cabot, especially, we are experiencing and pursuing a strategy that’s similar to Midland in the U.S. which is improving liquidations, looking at cost efficiencies. Now both those factors, despite a competitive market make us more competitive and when we bid and win portfolios. And that is in large parts, going on, that’s allowing us to win portfolios in a somewhat competitive market but at good returns. And I will let Paul chime in as well about general conditions in the market there or the results of Cabot. So...

Yes, I think Ashish summarized it very well. We’re seeing very positive results from all of the various programs that we put in place which is allowing us to be more competitive and winning more volume at solid returns. So it’s despite the fact that there are lots of competitors in Europe, we’re able to deploy capital and liquidate and generate good returns because of these programs we put in place. And we’re seeing the ability to deploy more at similar returns to what we’ve been able to generate in the past, which is the reason for the increase. There have been some decent sized deals earlier in the year which has resulted in the $90 million of deployment. As I think many of you know, the market in – the various markets in Europe are not necessarily as steady as they are in the U.S. in terms of volumes every single quarter, but we are – we had a great quarter and anticipate being able to continue to deploy capital effectively there going forward.

So what exactly have you changed in your process that improves liquidation obviously, and bridge that over to United States as well? What have you changed to improve those liquidation rates? Or is it even just consumer behavior changing?

This is the result of a dozen initiatives across all of our channels, both in terms of how we speak with our consumers, when we contact our consumers, what the messaging is to our consumers, the offers to them, differences in technology in terms of online versus on the phone, different scorecards, different use of databases in terms of finding consumers and figuring out which ones to discuss or to talk to. So it’s literally dozens of initiatives that when accumulated, results in higher liquidation and more efficiency. And as we’ve explained to you in the past with respect to the U.S., we’ve seen an improvement in liquidation over the last several years of nearly 50%, and we’re seeing very strong results in the U.K. as well from these programs.

Has there been any shift in strategy of using India as a collector base versus domestic or locally, I should say?

This is Ashish. I’ll jump in. So for the U.S. business, there’s been no shift from prior years. We have operations – multiple operation sites in the U.S. and we have one in Costa Rica and a large one in India. So we continue to use all 3 geographies for very similar kinds of accounts. Of course, Costa Rica is very much focused on Spanish accounts, Spanish-speaking accounts but all our account managers there are bilingual as well. So we are able to maximize liquidation, just kind of matchup the need from a portfolio purchasing mix with the capabilities and the size of account manager or call center teams that we have. So no real shift there, just continued optimization and where we place which kind of accounts and how we train our account managers and how we talk to the consumer. A big shift in our call approach that is very consumer-focused now and generating returns that are much longer-term.

And in The United States, have you seen any change in the competitive environment? I know there is one entity that’s kind of being purchase through spec, but have you seen any differences there?

In the U.S., I think broadly the set of players is the same which is Encore and our main other competitor, and the other players are midsize or smaller size. They continue to deploy some amount of capital, but the 2 largest players still have a large part of the market share. And it may jump around quarter-to-quarter and we see that over time. But the moat, as we’ve talked about, from a regulatory point of view, is still very real. The regulations of the OCCs through that issuers abide by and actually enforced by auditing us are still there. So there might be some players who might be able to deploy a little bit more capital here and there, but anyone who wants to enter the sector will create significantly high costs and barriers that we’ve talked about in the past.

And last one for the moment. Return of the banks, have you seen any change in behavior from the 3 sidelined issuers?

We have not seen any actual issuers come back to the market. We continue to have conversations with most players in the industry and we watch. We run our business as if they are not back. And the volumes have continued to grow in terms of the face amount available, in terms of dollars deployed over the last several years, and will continue to grow as the outstandings and the loss rates of the issuers who sell are growing, as you can see from their calls. So we run our business as if they are not coming back, but we are very well prepared in case they do. And we actually feel that over time, as loss rates will grow, their books are growing, they will see debt sales as another channel and tool to manage their losses. And over time, I expect that, that may happen. And when they come back, we are well positioned. As you heard from us in the past, we’re able to expand capacity fairly rapidly across the globe and in a very cost-efficient manner as well, and that differentiates us from others. So when they do come back, we’ll be able to react and respond to the market very, very quickly.

All right, thank you.

You’re welcome.

Thank you. Our next question comes from the line of David Scharf of JMP Securities. Your line is now open.

Hi, thanks for taking my questions, a few clean-up ones here. Just wondering, when we get the notice of proposed rulemaking in the fall from the Bureau, I don’t know, have you gotten any sense for whether there will be anything materially incremental from what you and your competitor unilaterally settle with them 1.5 years ago?

David, that’s a good question. In terms of the notice, so just to set the context for everyone, the original advance notice was issued back in 2013. I mean, the CFPB wanted to learn about various industry practices. And then a year ago, in July 2016, they issued a little bit more outline on the proposed rules. I mean, preparation for the [indiscernible] the small business panel. That’s when they issued a little bit more specifics. And I would say largely, it was in line with what we and our competitor has implemented because of our consent orders. And that’s about 2 years old now, so it’s second nature to us. There might be a few things here and there on the margin, but we have to wait and see what will actually be in the actual proposed rules that will come out in September. And then, there’ll be a long process for comments and so forth. And then if things go perfect, I would expect sometime in 2018, they may go into effect. But we largely felt, based on at least what came out a year ago, that we were in line and had already implemented the changes that were being proposed. But again, we’ll have to wait and see one or two marginal things that are different. I’m sorry, go ahead.

Right, no, no, no, that’s fine. I guess, is it a high level? I mean, is it your belief that once the rules do get implemented, it should improve your competitive positioning to the extent that third-party agencies and other buyers have effectively been a little bit advantaged relative to you because they haven’t been playing by the same rules that you agreed to in the consent orders?

You’re absolutely right, it should. I mean, it will raise the bar to the standards we’ve been adhering to for the last 2 years. And it will improve the industry, it will raise the standard for everyone. And they will need to start doing it well in advance. I mean, the specifics come out in a couple of months, so you’re absolutely right.

A few questions for Jonathan. I guess, one, just so I do the math correctly, I know that very often when we try to convert from the U.K. to U.S. accounting on the revenue side, it’s not always so transparent. But when I think of the impact of the allowance reversal in the U.K., if I just back of the envelope take $8 million, that not only hits revenue, it hits pretax, just tax affected at 40% divided by the shares. Should I be looking it at it that way, as basically $0.18 of your adjusted earnings this quarter was from that reversal?

No, that’s too heavy. I think you – if I followed you, I don’t think you factored in the fact that we only own 43% in the economic interest.

Ah, okay.

And then tax affected, right, so...

Well, I did tax affected, yes. Okay, so maybe $0.08, $0.09. I guess bigger picture, I mean, there was obviously, I guess, it was what, it was back on the Q3 call that you quantified the allowance and there was – I can’t even remember. I mean, it was upwards of somewhere between $80 million and $100 million.

$94 million.

$94 million. So here we are, happy a year later and reversing it. I don’t want to maybe put you on the spot too much, but...

No, it’s...

Is this the first of many to come? How conservative was that?

I think the way to look at it is, when we did our curve back in Q3 of 2016, that was the best curve we could come up with. That’s what we’re required to do by GAAP and that’s what we did. We took a – since that time, it may only seem to you like it’s a happy year, but we actually have 3 quarters under our belt, including the current quarter, and many of the liquidation improvement programs that Cabot was putting in place started actually before we took the impairment last year. But of course, it was too early to tell what they would yield. And if I could remind you, the issue when we took the impairment, the original back in 2016, was driven by expectations for what we thought we would achieve longer-term on liquidation improvement programs that didn’t come to pass, right? And so now they’ve come to pass, a new set of programs, this is truly from bottom up, very consumer-centric and constructive ways to increase liquidation. They’re starting to get some real traction and we’re seeing it in the results. Now, I can’t speculate on what does that mean going forward, because if I can sit here today and say, tell you definitively that we’re going to be able to have x, y or z for reversals in the coming quarter, then I would take them today, right? So it is just a – we do take it each quarter at that time. We feel very good about where we stand today. And we’re excited what the future might hold, but I’m sincere in saying that we’ll figure out the next quarter when we get to next quarter.

Got it. And I know you sort of qualified if you can’t discuss too much on the Cabot proposed IPO, but maybe a question about your specific comments because Ashish, I think you did discuss the concept of deconsolidation and is it – I just want to make sure. Is it fair to conclude that whatever structure is being proposed or that being able to get from a control standpoint, your ownership or board representation down to a point where you can deconsolidate that, that’s definitely an objective of the Encore board?

Yes, we’ve decided to be clear, John. Just to be clear, we decided that if an IPO takes place, then we will relinquish board control and intend to deconsolidate Cabot. And as I’m sure you’re aware, what that means is we will have – remove their assets and their liabilities from our balance sheet. We’ll remove the individual line items from our P&L. We will have effectively, one line in the balance sheet and one line in the P&L which represents the influence of Cabot. And I’ve come to learn, we will have a very, very, very large disclosure section footnote on all that Cabot means to us. But in terms of financial statements, it will be much cleaner. It’s also a fresh start, by the way. That’s the way we refer to it. And so at the point that you deconsolidate, you value Cabot at that point and flow that through your balance sheet as well.

Got it. I mean, at the end of the day, we’ll have a P&L, but we just remove the equity and income of joint – unconsolidated entity that gives us Midland and then we can look to see where Cabot is valued in the U.K. Just a definitional thing, when you talk about the forward commitments, I know I never asked this. The $425 million, for example, is that forward for quarter or is that calendar 2017, inclusive of what’s happened year-to-date?

That is for calendar 2017.

Okay. For the full year, inclusive of what you’ve already purchased year-to-date?

That is correct, yes. That was correct.

Okay, got it. And then, lastly and sort of nitpicking. I was a bit surprised actually on the last 2 presentations when you quantified the year-over-year pricing trend in the fresh purchase market domestically. I think you had 15% both times. You pull that out this time around, and anything we should read into that or conclude?

You’re right. We had talked about it previously and just to remind, that was about 15% price improvement we have seen from 2015 to 2016 and then you have said from 2016 to 2017. Pricing remains favorable and kind of similar trends. We just didn’t repeat that it’s anything incremental or whatever, but it remains favorable in the industry at similar, positive levels. That hasn’t moved over the last 2 years.

Okay. And then just last question in terms of the status of some of the big sellers in the U.S. I mean, we can all speculate on our own about the big 3 that remained absent from the market. But from the standpoint of your assessment of the seller’s comfort level with their own documentation and your documentation practices as they exist today, specifically for purposes of pursuing legal collections. Is that a barrier anymore in terms of any issuers having to invest in internal record keeping and data transfer? Or do you feel like it’s really just a question of if they want to decide to sell, they can start again?

So I can answer that question in a couple of parts. The sellers who are selling and we work with, again, we talk to others as well. So the industry has been moving towards better quality of data and it was generally – always accurate but improved documentation over many years. Now, the consent order made some requirements that we had to have and therefore, the issuers had to provide us. And that took a little while for the issuers to adjust to, including hiring some people, changing processes and how we exchange documents. All that is done and taken care of. The quality of documentation is very high and the percent of accounts that are fulfilled for documentation is extremely high. So all of that has been taken care of by all the sellers who sell. And we are able to get those documents and the industry is able to get those documents for pursuing any kind of collections activities, whether it’s for disputes or for legal collections or any other follow-up activity that is there. So issuers are very comfortable and are able to fulfill all of the requirements that we are consent orders added to what they were already providing and had been improving over the years.

Got it. And then last question for you, Ashish or Jonathan. As we think about some of the add backs and trying to gauge kind of more normalized cash flow and earnings power, it looks like there was another $3.5 million, I think, under the acquisition integration restructuring line. Just looking at the last quarter’s presentation, this looks like it’s – the 8 out of the 9 quarters in a row of something in that line, 8 out of 9 of those were well above $1 million or $2 million. Can you remind me what’s in that and...

Yes.

Whether it’s recurring or not since it’s going to – it seems to...

It’s not recurring, it’s primarily driven by the Cabot IPO – oh, M&A, I’m sorry. I misspoke, the Cabot M&A. There are some other acquisitions. They made one, they’re looking part of another, so [indiscernible] that’s where it’s – very little is coming from us, right.

Got it. Okay, thank you very much.

Thank you. [Operator Instructions] Our next question comes from the line of Robert Dodd of Raymond James. Your lines is now open.

Hi, guys. A couple of simple ones, I think. On the tax rate front, obviously it’s down a little bit this quarter. I obviously realize that there was a change in the U.K., but are we going to see a continued downward trend? Or what’s kind of – what would be a normalized figure for that as much as you can figure that out in an FX environment, et cetera? And when do you think we would get there?

Hi, Robert, it’s Jon. As you know, we had a lot of volatility in taxes at year-end. And I told you that I expected that it would settle down some and it started to. I think it’s reasonable just sitting here today, to think of a tax rate in the low 40s. I expect there is some – that may get better than that during the course of the year, but it’s all going to be driven by where we earn our income, right. That’s going to be the driver.

On Cabot, obviously, you’re talking about trying to get up board control, et cetera, so that you can deconsolidate. Would the – is the current plan to maintain the same economic interest in Cabot or at least the same economic interest in the sized Cabot we have today? Obviously, if it goes public, maybe the capital gets bigger. I’m just trying to gauge basically, with the forward earnings contribution, all other things being equal which obviously they never be the same under the equity method accounting as it is on consolidated, it would just be all cleaner under the equity method. Is that fair to say?

This is Ashish, I’ll answer this and Jon can jump in. But the deconsolidation will clearly clean out how – make a change in how our financials are recorded. It would be pure speculation to say kind of would we be selling part of our stake or not or keeping it at this point, we cannot comment on that.

Okay, fair enough. And then...

We’re reserving all our options and we’re not – and we’re not going to speculate on what we might do.

Okay, fair enough. Thank you. Last one, if I can. On the cost to collect, obviously you made incremental investments, the type of accounts that are being acquired, you say a higher return that required some upfront investment right now. Out of the Q in Q4 just in the U.S. cost to collect ratio of 44.5, obviously, that was up from the first quarter. Is this kind of the like near-term rate? Obviously, that will change longer-term but – or there is incremental investment that’s still required, given the mix of types of accounts you’re buying today versus where you were 2 years ago or a year ago?

The mix keeps changing as we said in the past. We did start buying certain portfolios that had somewhat of a lower balance. So for every dollar deployed, we were getting more accounts which clearly adds to cost in lettering, adds to cost in account managers and cost in legal. So that’s continuing. Now, mix changes quarter-to-quarter. We have been adding the capacity and we are close to getting done on that, at least for the woman. Again, we adapt to the market. And the other point is, comparing to a year ago, that is the third reason I had mentioned. In 2016 Q2, we had experienced a significant slowdown in legal placements as we were getting ready for documentation, as issuers were preparing the documentation for legal placements. So that was an artificially lower rate of legal expenses. So just to keep that in mind as well as you think about the future.

Got it. Yes, I appreciate that, thank you.

Thank you. Our next question comes from the line of Mark Hughes of SunTrust. Your line is now open.

Some dialogue last quarter, your predecessor, Ashish, was talking about kind of the stepped-up spending that you intended to do in order to take advantage of some of these opportunities. But you suggested a full-year outlook would be kind of unchanged by that spending. You did not quantify the full-year outlook, but it’s – the full-year outlook as expressed on the consensus hasn’t changed much since then. Anything you’d like to say on the topic? You had just sort of addressed the cost level in Q2 and how it might play out in the balance of the year, but any thoughts on the full-year outlook?

Mark, so we do not give specific guidance on earnings for the year. But what Ken had said previously kind of for us still as we are on track with our expense plans, on track with our capacity increases, on track with the volume that had come incrementally in terms of lettering costs or account manager costs. So that’s what I would say at this point. Our plans are kind of in place and we are tracking well. So hopefully, that’s helpful.

And then of the $425 million in commitments, how much of that has already been purchased? Which is to say, how much is left to go of that committed amount?

I think for Q2, we gave the number of what we’ve deployed. So I would just take that number and subtract it against the $425 million to add and apply what was remaining to be purchased starting in July.

You did give the commitment – the purchases under before it closed.

No, we do not. So those are signed contracts but actual purchases happen month to month. And also, the volumes change, there’s fluctuations on a monthly volume based on what’s charging off. So that would be speculation and that’s something we have not provided in the past.

Is it fair to say you’ve done roughly half of that amount and so, maybe half is left to go, subject to fluctuations?

Yes, there is a 6-month number in our financials for June...

Yes, Mark, I think one way to look at it is you know what we spent in the U.S. year-to-date, so the rest must be foreclosed, right? And so that will give you a rough estimate of where we are with the $425 million.

Okay, thank you. That’s it, thank you.

You’re welcome, thanks.

Thank you. And I’m showing no further questions in queue at this time.

Okay. Thank you, and that concludes the call for today. Thanks for taking the time to join us, and we look forward to providing our third quarter 2017 results in November. Thanks.