Encore Capital Group, Inc. (ECPG) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Encore Capital Group's Q3 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to your host, Mr. Bruce Thomas. Sir, you may begin.

Thank you, Operator. Good afternoon, everyone, and welcome to Encore Capital Group's Third Quarter 2018 Earnings Call. With me on the call today are Ashish Masih, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; and by phone, Paul Grinberg, President of Encore's International Business; and Ken Stannard, the CEO of Cabot Credit Management, our subsidiary based in the U.K. Ashish and Jon will make prepared remarks today, and then, we'll be happy take your questions. Before we begin, we have a few housekeeping items. Unless otherwise noted, comparisons made on this conference call will be between the third quarter of 2018 and the third quarter of 2017. 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 in 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.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining our conference call. Today, Encore announced financial results for the third quarter of 2018 that included records for both collections and estimated remaining collections. This reflects our progress innovating our collections process and the benefit of adding operational capacity over the past couple of years. This performance is indicative of the health of the major markets we serve and our market positions. This quarter's results include roughly two months of our 100% ownership of Cabot because we completed the Cabot transaction on July 24. As expected, our GAAP earnings results in Q3 were substantially impacted by items associated with the transaction. This transaction brings certainty to our future together and the freedom to implement our strategies and fully share proprietary information. We believe that owning Cabot will benefit Encore in both the long term and the short term. We are now a clear leader in both the United States and in the United Kingdom, the world's two most important markets for our industry. And we expect that these markets will generate long lasting cash flows and favorable returns for years to come. I'd like to highlight a few areas of Encore's third quarter performance. Encore earned GAAP net income from continuing operations of $21 million or $0.69 per share. Adjusted income was $36 million or $1.19 per share. The vast majority of the difference between a GAAP and adjusted results in the quarter was driven by the costs associated with the Cabot transaction, which Jon will cover in his remarks. Global collections were up 13% to $499 million, representing a third consecutive quarter of record collections. The increase in collections continues to be driven by the capacity we steadily added over the past several quarters and our ongoing focus on operational innovation. Our ERC or estimated remaining collections, also reached a new all-time high of $7.2 billion at the end of the third quarter, growing 10% compared to the same period a year ago. I'm also pleased to highlight Encore's continued strong cash generation. We believe adjusted EBITDA when combined with collection supply to principle balance is an important measure of return of capital to the business. This cash generation enables a number of valuable activities, such as growing the business, deploying capital for debt portfolios, reducing debt and investing in innovation. Our increased level of adjusted EBITDA over the past year has given us the flexibility to achieve record deployments as we simultaneously added collections capacity in the U.S. business, while also completing the Cabot transaction. In the U.S., the market for debt purchasing remains favorable. The Federal Reserve recently released August 2018 figures and revolving credit in the U.S., which is comprised largely of credit cards, has again reached an all-time high. Commentary from issuing banks during recent earnings reports confirmed that credit card outstandings continue to grow. At this point in the macroeconomic cycle, we believe that loan losses will continue to rise in the coming years, providing us significant opportunities to purchase large amounts of charged off debt from issuers at attractive returns. Consistent with this expectation of healthy supply, pricing in the U.S. market remains favorable. According to our estimates, the fresh segment continues to grow as a percentage of the overall market and will comprise more than 85% of all charged off credit card receivables to be sold in 2018. We remain particularly well positioned to benefit from this industry trend as we have focused on expanding capacity and improving our ability to collect on fresh paper over the past several years. We purchased $123 million of portfolios in the U.S. during the quarter and have secured forward flow purchase commitments that will continue on solid momentum into next year. Through the end of Q3, we have deployed more than $500 million in the U.S. and remain on track to purchase more paper in the U.S. in 2018 than in any other year. From an operations perspective, collections in the U.S. in Q3 were at their highest level ever and were 18% higher than the same period a year ago. In particular, call center collections were up 33% compared to the third quarter of 2017. This performance was driven by operational innovation, as well as the effectiveness and efficiency of our steady capacity expansion. We are seeing results from our investments in our digital collections platform as online collections were up 50% compared to a year ago. This investment in digital collections and other technology programs, including speech analytics, provide opportunities to increase our efficiency and make the best use of our scale. Turning to the European market, the third quarter was characterized by strong deal flow in the U.K. and several countries in Continental Europe. Following record portfolio sales in 2017, and encouraged by continuing regulatory and supervisory pressure, banks across Europe are continuing to improve the balance sheets through sales of their charged off receivables. We expect this activity will continue through 2018 and beyond. Overall, we are seeing banks selling paper at closer to charge off than they have in the past. We are also seeing a growing pipeline of servicing opportunities as banks seek solutions for their increasing credit management needs. Our European business remained disciplined and is purchasing in Q3 while deploying $115 million on portfolio purchases at solid returns with the majority of buying taking place within the U.K. We are increasingly engaged with a broad range of banks to satisfy their servicing requirements through BPO contracts and in pre and post charge off opportunities. These are areas of trends for our European business and provide us with greater opportunities to make off market portfolio purchases from these banks, which supports the FCA's desire to provide continuity for the consumer. As in the U.S., we are investing in our digital collections platform, speech analytics in our call centers and other technology to improve the quality of the consumer contact and to make more efficient use of our resources and scale. In fact, Cabot was recently recognized at the Credit Excellence Awards in London for best use of technology in the area of customer engagement. This demonstrates how we are embracing technology to not only enhance our collections abilities, but also to improve the consumer experience. I would now like to hand the call over to Jon for a detailed look at our third quarter results.

Thank you, Ashish. Before I go into our financial results in detail, I would like to remind you that as required by U.S. GAAP, we are showing 100% of the results for Cabot and Refinancia in our financial statements where indicated, we will adjust the numbers to account for non-controlling interests. Keep in mind that the Cabot transaction was completed on July 24, which means that we were partial owners of Cabot for a stub period during the month of July 2018. Deployments totaled $249 million in the third quarter, compared to $292 million in the third quarter of 2017. We deployed a total of $123 million in the U.S. during Q3, all of which represented fresh portfolios of charged off credit card paper. This compares to $111 million of U.S. deployments in Q3 of 2017. European deployments through Cabot and Grove totaled $115 million during the third quarter, compared to $177 million in deployments in the same quarter year ago, which was an exceptionally strong quarter. We deployed $11 million in other geographies in the third quarter, including purchases in Australia and Latin America. Worldwide collections grew 13% to a record $499 million in the third quarter compared to $443 million a year ago. Collections in our domestic call center reached an all-time high of 33% compared to Q3 of last year, as we continue to benefit from additional collections capacity, and the acquisition in recent periods of portfolios with higher returns. We also reported strong collections performance in Europe in the third quarter, growing 7% compared to the same quarter last year. Worldwide revenues, adjusted by net allowances, grew 10% in the third quarter to $337 million compared to $307 million in the prior year. U.S. revenues, adjusted by net allowances, were $179 million in the third quarter, up 16% compared to the same quarter a year ago. In Europe, Q3 revenues, adjusted by net allowances, were $137 million and grew primarily from the increase in collections driven by our operational innovation, as well as additional servicing revenue from Wescot. Encore generated $32 million of zero basis revenue in Q3 compared to $34 million in the same period a year ago. Our ERC was a record $7.2 billion at the end of the third quarter, up 10% of $653 million compared to the end of the same period a year ago. In the third quarter, we recorded GAAP earnings from continuing operations of $0.69 per share. In reconciling our GAAP earnings to our adjusted earnings and after applying the income tax effect and adjusting for non-controlling interest, we recorded adjusted EPS of $1.19 per fully diluted share, and our non-GAAP economic EPS was also $1.19. We did not exclude any shares from the calculation of our economic EPS in the third quarter. The vast majority of the adjustments contributing to the difference between our GAAP and economic earnings were related to the completion of the Cabot transaction in the period. These items included among other things financing fees, incentive and retention compensation items and the currency hedge. The cost of the hedge was substantially offset by the reduction in the cash portion of the purchase price for Cabot, the benefit of which does not flow through the P&L. We also recorded certain discrete tax charges in the third quarter relating to previously established deferred tax assets in Latin America from which we no longer believe we will receive benefit. Our tax rate was also impacted by the effect in our earnings of the expenses related to the completion of the Cabot transaction. In the U.S. during the third quarter, we successfully exercised the remainder of the accordion feature associated with our U.S. credit facility, increasing total commitments by approximately $100 million. In connection with this exercise, we also extended the maturity of approximately $100 million of revolving commitments from February 2019 to December 2021. We similarly improved flexibility and maturity schedule of Cabot's capital structure by extending and expanding Cabot's revolving credit facility and extending Cabot's asset backed line of credit. One additional note, in order to reduce our exposure to potential future interest rate increases in the U.S., we recently hedged a significant portion of our debt. As a result, approximately 80% of our U.S. debt is now either hedged or bears a fixed interest rate. Similarly, we have employed an interest rate hedging strategy in Europe. Consequently approximately two-third of Cabot's outstanding debt now has an interest rate that is either hedged or fixed. With that, I'd like to turn it back over to Ashish.

Thank you, Jon. In summary, I am pleased with Encore's recent operational and financial performance. We reported record cash collections and ERC in the third quarter, an indication of our continued strong operational performance. The U.S. market for debt purchasing remains favorable and we are purchasing receivables at strong returns. We expect to end 2018 with record deployments in the U.S. by a large margin compared to prior years. U.S. collections are exhibiting solid growth while collections in the call center channel are growing at an even faster rate. The drivers of this growth are expanded collections capacity and our improved ability to liquidate portfolios. These factors position us well to capture the attractive returns available in the growing U.S. market. Our acquisition of the remaining interest in Cabot is a transformational event for Encore. Cabot has a highly differentiated platform and is a leading player in the U.K. in both debt purchasing and servicing. With a strong growth platform in several additional markets in Europe, Cabot provides access to significant strategic and financial opportunities for Encore. We are the global leader in debt purchasing when measured by ERC. We are well positioned to capitalize on new opportunities and deploy capital across the world's most important markets to capture the best returns. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions] Our first question is from Mark Hughes with Sun Trust.

Could you give us some tricks around collections expense. I can see that you'd put that in the presentation. I'm sort of curious how it looked this quarter year over year.

Do you mean, Mark, cost of collect, which we have always provided. You will notice that in the U.S. our cost to collect went down a little bit when compared to the quarter a year ago, which also impacted actually in Europe as well and overall number went down. Now with regard to cost to collect, I want to just step back and make sure I highlight that we don't focus on cost to collect as a goal in itself. It's an outcome of many factors. Now we want to make sure we are managing expenses very effectively, which we are in G&A areas, but in operations, managing the cost to collect within our channel is important and then what you see is a blended effect of multiple things and includes our collection strategies, the mix and types of accounts we buy, whether it's higher balance, older or fresher accounts. And the shape of the cost, when you buy portfolios, for example and legal is more front loaded versus call centers, you are seeing, and as I indicated, a higher growth rate in call center collections in the U.S. And that is starting to impact the mix shift because legal cost to collect is higher than call center and you're starting to see that effect in the U.S. cost to collect for sure. And as you work to improve the channel and build capacity that is now starting to pay dividends. So hoping that addresses your question. If not, please let us know.

On the legal collections front, what do you anticipate the strategy's going to be if we go back a couple of years? Legal collections are much more prominent in terms of the collections mix. Are you going to get back to that or is there an opportunity to boost collections by increasing your legal?

On that front again, I would go back to some part of my earlier points. The legal mix, again the mix that you see is a result of varying multiple factors. One is what are we purchasing in terms of the types of accounts? For example, if it's low balance, the cost is a per unit cost in legal as well and it may -- as a percent of collections it rises. It results a reflection of some of the older books that we got as part of prior company acquisitions, which had a very significant portion of legal and those are running off. And then finally, it will depend on what we are buying in the forward flows, which are fresher, somewhat higher balance. So we have not held back on investing in the legal channel to any vertical number. We optimize cash and cash returns for each portfolio to maximize the IRR. And which means at the investment committee time, investment time we set a target of expectation of what the mix is going to be in legal, call center and so forth and they execute on that and clearly adapting as the time goes by. So what you see in terms of the mix is a reflection of all of those factors. That said, I'll highlight the same point again that making a concerted effort using our call strategies, as well as some of the technologies to improve and increase call center collections and as well as increase capacity that we've added over the last, I would say seven or eight quarters beginning of 2017 is when we started adding very steady growth and capacity and that is starting to show off in high percent of call center collections.

Our next question comes from David Scharf of JMP Securities. Your line is open.

A couple of things; one is wondering if I can just get a little more commentary on how we should be thinking about U.S. purchase volumes. I know you're on pace year to date for a record year and you provided obviously very positive sort of top down commentary based on what the card issuers are seeing. It seemed like this quarter may have been the lightest purchasing quarter in three years and I'm just curious if there was anything behind that, if it was just sort of lumpiness or focused on Cabot integration?

Thanks for that question, David. Let me answer it in a couple of ways. One is just to give color on the market itself and then I'll respond to kind of the number you saw in Q3 for Encore for U.S. So on the market, we are seeing steady increase in volumes and it's driven by two factors. Just simple math of the overall lending of credit card outstandings and loss rates. Now lending continues to grow. As I said, the Federal Reserve is again highlighting their record growth and that's beyond $1 trillion now and continues to rise. And the second one is loss rates that some of the issuers are reporting and we follow them very closely. For the last two to three years they've been rising, although this quarter some may have tapered off or gone down a little bit, but if you look at a year ago comparison, they're kind of flat and over two to three years rising. So even with those little bit of tapering with the higher outstandings, the total volume coming to our industry has been rising, which is the dollar volume that matters. And when you combine the charge off rates and the higher outstandings. The other context on the industry is a few years ago, couple of years ago in 2016, our estimates lead us to say that about $1.5 billion was the capital deployed in 2016 and we think this year in core outside bankruptcy and not including bankruptcy it's going to touch close to $2 billion, $1.9 billion to $2 billion in deployment. So that's the growth that's a backdrop to us. The other one is this quarter, again things can be lumpy and we have a lot of fall through as well, so that reduces lumpiness. But this quarter is much more of an average quarter and I would encourage you to look at a cue that'll come out. For example, if you look at it, not just a three month view, but the nine month view, for U.S. nine months ended this quarter, we would have deployed 37% higher when compared to a year ago. That's $366 million versus $504 million in 2017 versus 2018. It's clearly up quarter to quarter at an average level, but if you looked at the nine months and that's what gives us the confidence and the forward flows that we'll end the year by a large margin ahead of any year that we've had a U.S. deployment in.

Just to be clear, your reference to thinking about this quarter is closer to an average. Meaning the $123 million level or ?

That is correct.

So we should be, okay, perhaps thinking about that as a more regular going forward?

Yes, but as I said, for the nine months we have crossed -- we're at about $504 million compared to $366 million a year ago for the nine months, so that's 37% higher for the year to date.

But it sounds like you're signaling $500 million through nine months is somewhat of an above trend figure. We shouldn't rely on that as necessarily sustainable going forward.

It is reflecting the market increase we are seeing, so as I said, in 2016 about $1.5 billion was deployed nationally by all debt buyers we think and it's $2 billion probably this year, so that's a pretty substantial 33% increase over that time frame. So market is growing and we had success, given our liquidation improvements and being able to get good returns, but also in portfolios that we want. So we're on-track [indiscernible] forward flows to have a very strong year. And I don't expect that to be an anomaly, we expect that to continue, given what we see the flows coming through, issuers plans that we can best estimate for next year as well.

Just shifting to the U.K. or Cabot more broadly, a couple of questions. One is the -- it looks like the magnitude of allowance reversal moderated quite a bit this quarter. And I'm wondering if that $4 million level is more in line with the next few quarters' expectations? It seems like there were bigger reversals of that big roughly $100 million charge a couple of years ago. But should that be moderated going forward?

There's about, after this quarter, there's only about $18 million left. And I think just if a goal is to figure out -- I can't give you a forecast of what I'm going to see going forward, because if I do that of course I've have to take it today. But I think you're capped at $18 million, right? I don't even…

That answers it, that's helpful. That's all I need to know, that's perfect. And just based on collection trends over there or -- if we kind of -- I haven't done the math an it's not really broken out in the slides, but if I kind of ignore the allowance reversals over there, as well as pulling out Wescot, did Cabot revenue grow year over year sort of organically? Like just the core debt purchasing collection business?

We look at this Cabot as a single unit, David. We don't break out in such a way that we can give you a helpful answer.

David, if I could just add. Collections that we report in our Q are only debt purchase collections, so that would indicate the health of the collections business in Europe. In our Q you will see for the three months it's $144 million versus -- last year, versus $153 million this year. So it's an increase and even over the nine months it has gone up in terms of collections. And those are pure debt purchasing collections.

And then the $12.5 million, the acquisition charges, it mentions integration as well. Once again, going forward these next few months, given that Cabot had already been part of Encore effectively for three years, should we be expecting any more integration related charges near term, or is that pretty much been accomplished during Q3?

Sitting here today I don't see anything that -- I can't say there won't be something that's a trailing related somehow to integration, but I don't see anything. I look at these as one time.

[Operator Instructions] Our next question comes from Brian Hogan of William Blair. Your line is open.

Quick one on the servicing revenue. Down quarter over quarter, I mean it's obviously up over year over year on the Wescot. But is that FX driven or is it just a slower trend and seasonally? Or what kind of like quarter over quarter move?

It's just down -- servicing revenue is just down, or other revenue, or serving revenue is just down just a little bit. I would call it flat. So it's flat.

I mean what I'm trying to get is do you expect that revenue line to grow? What kind of growth rate are you expecting out of that number?

This is Ashish. I can just jump in. So servicing revenue, which is embedded in our other revenue, is being kind of heavily reflecting our Wescot business. And they are seeing a lot of good opportunities in BPO side of the business, as well as the traditional agency kind of servicing business and more and more BPO opportunities coming online. And pipeline coming our way. I'm going to let Ken Stannard, who is on the phone, jump in and kind of provide color on kind of what opportunities you've seen. And it sometimes takes a while, there's more expenses than time to onboard a bank or financial institution to sort of start servicing them. And then the revenues start coming over time. So I'll let Ken jump in as well and provide you some color on that.

I think you summarized it very well. I mean we are seeing a lot of opportunities in Europe and very much so in the U.K. of banks wanting to outsource more of their collections and recoveries. They traditionally already done that for many years in the recovery space. That's post charge off, but now they're wanting to take advantage of Cabot's equity, Wescot's expertise in their other service units in the early stage collections in what we call a business processing outsource model. So we're fighting into a very strong pipeline. We've signed a number of big contracts at the end of this year. But as Ashish says, that takes a while to onboard, takes a while to recruit what is a large number of heads in a quality fashion, so you will see some of that revenue growth coming through in the 2019 numbers, but no it's all moving in the right direction in the continued outsource of the collections recoveries function is effectively continue to happen over the multiple years in Europe.

And then do you actually see that servicing the BPO part, actually they didn't do some debt buying opportunities or is that helping there too or is it dissimilar?

Absolutely. I mean I think that what it does, first and foremost, is it embeds and deepens the partnership and the relationship we have with a major bank. So we do not want to be just a part time partner with banks in Europe where we periodically buy their debt. We want to have daily relationships where we're managing their customers with their brand name on a daily basis. The tighter the relationship the tighter we are, the more we understand their strategy for both servicing debt but also selling that debt and the better we can be prepared to purchase that debt and make the right offers to those banks at the right time. And that's exactly what we're doing at the moment. We have benefited from the Wescot acquisition already by being able to buy some of the assets that we were servicing in the post [indiscernible] and the BPO work is deepening relationships in a way that is benefiting definitely.

Sticking there in Europe, the competitive environment, can you chat about that please?

First and foremost it's a very strong market in Europe that the sales continue to increase. The amounts of outsourcing and servicing continues to increase. But with that, there's been clearly a lot of hungry competitors growing and taking advantage of that opportunity. I don't see any slowdown in the growth of outsourcing, so it's very healthy that the market's continuing to grow. The competition is always from quarter to quarter, market to market a little bit unpredictable and that's why it's really important to have a number of attributes firstly to be the dominant player in the biggest market in Europe helps enormously so we have more than twice the scale of any other player in U.K. financial services and that means that we have a better collections engine, effective as the collecting is much higher. So we can ride the waves of demand and supply very effectively in the U.K. because we've got a margin of competitiveness effectively in that market. We also then recently have built quite an interesting array of new markets where we're able to diversify our investments and pick and choose various different opportunities to deliver us very attractive returns in those markets. And Ireland's been a great example of that. Spain is increasingly a place where we are delivering on advantages relative to the competition and the Cabot and Grove combination has really helped that. And we can see a real path to competitive advantage in Spain and Portugal and France, who have been very interesting markets for us as well. And so that combination of being dominant in the biggest market and having the diversification to be selective and deliver attractive returns in other markets has enabled us to ride the various waves of competition over the last few years.

Have you seen any stabilization in the competition or is it intensifying?

I don't think there's a general intensification. I think what's happened is that there are smaller number of bigger players. What was become very apparent to industry observers. What you wouldn't have seen or wouldn't have been accurately reported a number of years ago was there were many, many more players. The seven big players in Europe today used to be 65 players about 10 years ago. And so the level of intensity of competition has always been there. I think what you're seen over the years is an increasing professionalism and accuracy in pricing and responsible governments of the remaining capacities in the industry. So yes, it's competitive, but we are delivering attractive and stable returns over the last few years. I'm looking at the returns from 2018, they're very, very similar, almost identical to the returns we did in 2017.

Shifting quickly to collections. Ashish you had commented that call center collections were really strong [indiscernible]. I guess what I'm getting to, have you seen any change in consumer behavior improvement in the recovery rates? Anything there?

Back to the U.S., I just wanted to clarify what I meant was 32% increase, not percent of total, but in call centers we have seen a 32% increase from a year ago. And I think that's what you meant, but just wanted to correct it for the record. Which is a very substantial increase, even though the U.S. collections were up as well combined. In terms of consumer behavior, when a consumer is really healthy in the U.S. right now, given where the unemployment rate is. And so we are seeing pretty stable consumer behavior in terms of ability to pay, hold onto payment plans. Now keep in mind the consumers we deal with, and because the sales are more fresh, I mean mostly fresh, they have recently had some financial difficulty in their life, whether it's job loss, a medical, or whatever it might have been. So despite the economy being good, they have experienced something that's kind of a difficult situation and our call model really focuses on kind of connecting with them, understanding what happened to develop the right solution as opposed to just trying to offer a payment solution or a discount and really understanding what will work for them. In finding good receptivity have not seen any change in behavior although we are able to get them on payment plans that are holding really well. And as you can imagine, even though you're again in a difficult situation, if you are -- if the economy is good, you're able to get back on your feet faster. But again, the people we are dealing with went through something fairly recently and it's not old paper. But for our older accounts and portfolio that we continue to work on, clearly the economy helps. But the payment plan rates and the break rates and all of those things seem fairly stable over time and that we can observe right now.

And then just briefly on the regulatory updates. Anything in the U.S. that you see as moving? Seems pretty quiet. Obviously had the elections yesterday and some of those results, but do you see any changes on the horizon?

Not really. Clearly the election results are just coming in, so as I have said in the past, I see the U.S. regulatory environment, but the environment that matters to our industry in three parts. One is the kind of there's a set of laws that are in place in the States and the FTCPA, so those are in place and we are in compliance with those. The second -- the related part is the BCFP proposed rules that have been in the making for many years, but now, at least the latest announcement has been and was there in the last quarter as well, is March 2019 is when they're looking to issue the notice for proposed rule-making, which will be more concrete set of rules. At this point my understanding is we believe that timeline will likely be met, but again it remains to be seen, given the election and any changes that may come from that, but that is the most important thing. But keep in mind, we've been given a consent order, etcetera. We've been complying we believe largely with the advance notice items that came out years ago. And so we are comfortable in the current environment if status quo continues without any rules. But even if the rules come out, we are very comfortable with it. It'll increase, actually level the playing field to some extent, although we wouldn't go backwards if the rules aren't established. The second level of regulatory environment is what the banks are subject to by the OCC and their expectations of third party management, which includes debt buyers and that's been pretty stable for many years and the banks have very stringent district audit programs, review programs. We have gone through more than 40 last year ourselves and passed all of them. And that's the standard that banks expect for their consumers to be treated, even though the accounts in portfolios have been sold. And we enjoy a very good partnership with banks on that front and being a buyer that's certified by them among the very few. And a third one I would say is one that's frequently asked is in the TCPA. And on that front, we have not seen any change in the recent quarter, although the FCC has collected comments, we expect some sort of changes to happen over time. But again, given elections or not, that has been slow to come. We're very comfortable in our operational practices under the current environment but if there's some relief that comes, that was to be expected or perhaps predicted rather. We'll take advantage of that and be able to work through those as well. So that net-net I would say it's been pretty stable, but the notice or proposal making potentially happening in early part of 2019, which again will take several months, maybe perhaps a year to go into effect.

And last one on the tax rate. What are your expectations going forward?

High 20s for all of fiscal year 2018.

And then 2019, back to your 26 that you had predicted or?

A little more vague in 2019. I'm confident in 2018. 2019 I do expect will be lower than the high 20s.

[Operator Instructions] Our next question comes from Dominick Gabrial [ph] of Oppenheimer. Your line is open.

Just real quick on the $12 million one timers. Where did that actually show up? Was that a contra revenue or where was that in the income statement?

The one timers, you mean the acquisition and integration related expenses?

Yes, exactly.

It would be split between SG&A and maybe some in operating expense and some in other income. It'd be kind of spread throughout the P&L.

And then you mentioned that you've moved a lot of the debt costs to fixed in the quarter. The interest expense has gone up a bit over the last two quarters. What do you think about a run rate on your interest expense, barring any sort of [indiscernible]?

That's awfully hard to -- you make the assumption that debt stays constant and interest rates stay constant and it's a lot of conjecture in there, right? I would expect we're going to have a lower interest rate going forward than we have today because there's some things that are in there that are tied to one-time events that won't appear again. But there's obviously -- there's a lot of caveats there, right?

Sure, of course. I just wanted to check on that. And then when you think about the purchases going forward and when you've talked to your bank partners and the supply of purchases you can have there, what really drives that? How much do you think is the loan growth versus the deterioration in actual credit that can really drive this higher? Can you put numbers around maybe the percentages of where you could see an inflection there in your purchasing ability?

Dominick, great question. What we know for a fact is over the last two to three years every major issuer's delinquency and charge off rate has been trending up. Although that rate of increase has slowed down or flattened out, but again there's a bit seasonality as well and normally Q1's are higher than Q4 if you look at the big issuers. So many of them are calling for that they moderated the growth. Some of the rate increase they would say was because of the rate of higher lending and deeper into the credit spectrum. That said, many of them are also talking that it is as good as it gets and as the macroeconomic trends, if and when they turn negative, rather when, that's going to impact loss rates pretty substantially. So I would say we are primed if I had to guess to -- we have a very large outstanding base in the U.S. and that is going to be impacted by a potentially rising loss rates at some point in the future, but over the next two to three years. Exactly when I would not be able to predict and would be making a mistake to do that. So that's the U.S. In Europe there's a different dynamic in play. There's more asset classes sold, even in U.K. utilities and so forth, but in Europe there's many more asset classes, sold and their reflection of sales is there's a lot of backlogged NPLs and also pressure from regulators and supervisors to clean up balance sheets. So there's a different dynamic at play that's creating the supply increase. And I'll let Ken jump in again to give color on the European market, but in U.S., just to summarize, overall balances have grown quite a bit and even with the pretty low loss rates, slightly above the lowest ever, we're seeing healthy supply increases and only they have to go up in the future. So I'll let Ken jump in on Europe now.

I think one of the contrasts in Europe is that we're not yet seeing increase in charge off rates, specifically in unsecured. If you look at the U.K., they're still at record lows. Other markets, still relatively low. So we're anticipating increase in charge off rates to come over the next year, two years, three years. But nevertheless, because the European market is behind the U.S. in terms of a propensity to sell, we're still seeing more coming to market because more banks are coming to market. Also they are wanting to sell fresher debt and a lot of that is coming, especially on the continent because of the ACB rules. The European Central Bank in stipulating that provisions have to be 100% up to two years of holding nonperforming loans in unsecured and seven years in secured, which is meaning that the banks really are incentivized to sell those assets on and get them off their balance sheet, which is getting all of the, even the slowest banks around Europe to really take action and come to the table. So I think we're going to see continued growth across Europe despite the fact that we remain in a very benign economic cycle and default rates are at record lows. And then after that, I'll see, I think our market will continue to grow because the core supply will then start increasing as lending increases over time.

Our next question comes from Mark Hughes of Sun Trust. You're line is open.

I'm sorry if I missed this, but did you give us the magnitude of the forward flows that you have secured?

We have not disclosed that at this time, Mark. We have a bunch of over flows that'll carry into 2019 and it's looking very healthy. But that's a number of competitive and other reasons we have not disclosed at this point.

And when you gave us the market size $1.9 billion to $2 billion versus the $1.5 billion, was that base year 2016?

Yes. So our business development team does a great job and has been in the business for a very long time and they are estimating kind of exactly which are selling, how much they are selling. So it is our estimate. And they've been pretty accurate. So that was 2016, $1.5 billion in deployable capital at the pricing levels in that year and to almost $1.9 billion or $2 billion is our estimate for 2018. That is correct.

They didn't happen to have an estimate on the face amount did they?

No. We try to work through kind of all those drivers of getting to this number, but face would -- get's very confusing and I'm sure there's a model that's used to get there, but we also know who's spending how much. We have pretty good guesses on that, so that is partly how we get to the $1.5 billion or the $2 billion number. It's also trying to relate it using what you're saying is the face amount portion, but I don't have that for you right now.

Our next question comes from Eric Hagen of KBW. Your line is open.

Just I guess given the fairly positive commentary in the opening remarks and in response to some of my peers questions, I guess your outlook may be feels a little misaligned with where the market seems to be evaluating the company. I guess I'm just curious what your thoughts are on some sort of capital return to shareholders, either in the form of share buybacks or delevering. Yes, just kind of your general thoughts on how you view those options.

I'll jump in and then I'll let Jon also jump in. So your observation is obviously very accurate on kind of how the market is viewing. There's other things happening in the market, so I won't on this call try to go into the reasons. Clearly we feel we are undervalued, given where the market is valuing our stock, given the opportunities we see in front of us, the liquidation engine that we've built. Proven liquidation improvements in U.S. and our European market, and especially the U.K. in the opportunities we see given the low level of charge offs and our success in that environment and what the future is likely going to be when some of the macro factors turn. That said, on capital deployment we look at a whole range of opportunities in front of us. Clearly spend some capital closing the Cabot transaction, so there's growth opportunities in capital deployment. There's the opportunity for that we just closed like Cabot. And innovation and technology and growing capacity that in the U.S. we feel we are right sized in terms of capacity right now, although if opportunities come we'll steadily increase that as well. But we've done that for two years. And when it comes to returning capital through share buybacks and all those things, we keep considering, and I don't have an answer for you that I can say yes, we're going to do that or not going to do that. That's something we evaluate on a recurring basis in terms of what the return of that is compared to the opportunities in front of us, combined with a whole range of factors that play into that. And Jon, you can jump in.

At the end of the day really, as you can imagine, this is very much a board level decision. We have regular dialogue with our board about stock price and there is no one on either side of the phone who's happy about where it stands today. We constantly look at this, constantly consider this and I'm sure we'll continue to do so. And as soon as we -- we'll disclose when we do it.

Does the company have an authorization in place to buy back shares? And if you do, how large is the – how…

We do have an authorization in place. It's $50 million.

And then maybe just sort of on similar lines, I mean I realize the optionality between buying back shares and delevering, or at least just kind of taking down leverage is very different. But how comfortable are you with the leverage in the company? I mean I realize the last bullet in your press release talks about the available liquidity and I'm just kind of curious how we should think about the option for you guys to at least take down leverage and just how comfortable you are with the available liquidity in the company. Thanks.

We're very comfortable with the available liquidity. Liquidity is not an issue. But we are very focused on our levels of leverage and I know you caveat-ed it at the front, thankfully. But you're right in that you can't talk out of both sides of your mouth, right, and you can't talk about stock buybacks and then talk about leverage. So we are focused on our leverage, we're comfortable with our leverage. I expect going forward longer term we'll probably be moving towards a lower level of leverage, but it's not going to be a straight line. And things are going to move up and down, depending on opportunities as they arise and if we get into a exceptionally good market, we're in a very, very good market now, but we're very optimistic about what the future holds here on the purchasing front, certainly in the U.S. And if it becomes an even better market, it'll probably put more pressure upward on our leverage. And we've got plenty of availability to handle that. And as I'm sure you're aware, all you need to do to reduce leverage a little bit is to -- or reduce leverage is to reduce deployments a little bit. I'll also point out that you get into this virtuous cycle. It's something, I don't want to say unique to this business, but it's somewhat unique, is that when the market gets really, really good and returns get really, really high, you can actually grow and not put any debt. And if it gets high enough, you can throw up enough cash so you're staying flat or decreasing. And it's a kind of an unusual dynamic. Our returns have gotten substantially better over the last couple of years and stay tuned. We'll see how it plays out for the next few.

I guess the obvious question that you probably expect I'm going to ask is what would be the IRR on new purchases that you think would allow that virtuous cycle to potentially take place?

Well we don't talk about IRRs, even hypothetically. It is kind of a competitive thing, as you can imagine. So I think with that I will decline addressing the IRR question.

And then just one more on liquidity. I mean I don't have the benefit of a historical kind of number or figure in front of me right now, but the $178 million of available kind of headroom. How does that compare to your, I guess, historical headroom relative to your ERC?

I don't chart that, but since I've been at Encore I'd say that was pretty close to the -- if I were to cuff it, the median of kind of that quarter in number. And by the way, that was at 9:30 today, we're about $200 million. So it depends a lot on the ebbs and flows of cash, but solidly comfortable with that. And by the way, that's, just to be absolutely clear, I can write a check for that today. We actually do have more availability to the extent that we get more ERC that exists within our facility, just so -- I just want to make sure you understand that that's the way this works. But that's -- I could write a $200 million check today.

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to management for any closing remarks.

That concludes the call for today. Thanks for taking the time to join us. We look forward to providing you our fourth quarter 2018 results in February next year. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.