Encore Capital Group, Inc. (ECPG) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Encore Capital Group’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now like to turn the conference over to your host, Bruce Thomas, Vice President of Investor Relations. You may begin, sir.

Thank you, operator. Good afternoon and welcome to Encore Capital Group’s first quarter 2019 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, Ken Stannard, the CEO of Cabot Credit Management. Ashish and Jon will make prepared remarks today, and then we will be happy to 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 first quarter of 2019 and the first quarter of 2018. In addition, 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 earnings call. Today, Encore announced financial results for the first quarter of 2019. I am pleased to report that our performance continues to excel and we achieved record results across several key financial measures. These results are being driven by our efficient operating platforms and strong positions in key markets. Global collections from our debt purchasing business were $514 million, surpassing the $0.5 billion mark for the first time. Revenues grew to $347 million in Q1 as U.S. revenues grew by 10%. By the end of the quarter, our worldwide ERC, or estimated remaining collections, had grown to a record $7.3 billion. In the first quarter, Encore earned record GAAP net income of $49 million or $1.57 per share. This compares to $22 million or $0.83 per share in the same quarter a year ago. Adjusted income was also a record in Q1 at $46 million or $1.46 per share compared to $26 million or $0.98 per share in the first quarter a year ago. As you know, our business generates significant amounts of cash each month as we collect on the portfolios we own. Our record net income in the first quarter reflects continued strong cash generation. We believe adjusted EBITDA when combined with collections applied to principal balance is an important measure of the return of capital to the business. Historically, our strong cash generation has enabled a number of valuable activities such as purchasing portfolios, reducing our debt, expanding our collections capacity and investing in innovation. Currently, our increased level of adjusted EBITDA provides additional capital for us to purchase portfolios, especially in the attractive U.S. market. From a supply perspective, the Federal Reserve’s most recent report indicated that revolving credit in the U.S., which is comprised largely of credit cards, continues to grow, reaching an all time high of $1 trillion in February 2019. In addition, the U.S. credit card charge-off rate in Q1 rose to 3.82%, the highest level in almost 7 years according to Bloomberg Intelligence. That data also revealed that delinquencies, a leading indicator for future charge-offs, increased in the first quarter at all 7 of the largest U.S. credit card issuers when compared to the fourth quarter of 2018. Against a backdrop of stable and favorable pricing, the debt purchasing market in the U.S. continues to provide us with opportunities to deploy capital at attractive returns. Looking forward, issuers continue to indicate that they expect loan losses to increase in coming quarters. Consequently, we believe that an even better market for buying portfolios is yet to come for this credit cycle in the U.S. When unemployment begins to rise, combined with the record level of revolving debt, we expect a meaningful increase in supply for our industry. Based on previous cycles, we expect this will lead to a further rise in purchase price multiples and even more attractive purchasing opportunities for Encore. 2019 is off to a solid start for our U.S. business also known as Midland Credit Management, or MCM. We deployed $174 million in the U.S. in the first quarter, consisting primarily of fresh paper. MCM collections were a record $330 million, growing 10% compared to the first quarter of 2018. Our consumer-centric approach to collections and improved productivity, continue to drive a higher proportion of call center and digital collections compared to legal and agency collections. As a result, our MCM call center and digital collections were up 15% in the first quarter compared to the same period a year ago. Our investments in our digital platform continue to drive online collections growth. In addition, speech analytics and other technology based initiatives provide opportunities to increase our productivity and make the best use of our scale. We are now seeing what we believe is just the beginning of the collections growth we expect from our MCM business going forward. Some of our collections growth stems from our record deployments in the U.S. in 2018 and even a larger portion of our recent collections growth is the direct result of our more effective collections operation. To help demonstrate how much we have improved our ability to collect, we have provided a look into our actual MCM collections performance data. One measure of improvement is our payer rate shown on the graph on left of Slide 7. The data shows that we are turning substantially higher percentages of accounts into paying accounts during the first year. In fact, the improvement was 44% for the 2016 to 2018 vintages compared to a baseline comprised of the 2013 to 2015 vintages. The drivers of this improvement include the success of our consumer-centric collections approach, our data and analytics innovation, as well as the improved quality of the paper we have been buying. The steep ramp of improvement during the first 3 months in the most recent vintages is the embodiment of taking the time to better understand each consumer and putting ourselves in a better position to collect as a result. Another measure of performance improvement is our first year cash liquidation rate. This data captures an even more important message. We are now collecting 37% more of the face value in the first 12 months. These results are changing our collections curves, with these early gains reflecting an overall increase in liquidations, improving upon the longer curves we have spoken off in the past. In simple terms, we are converting more accounts into payers, we are collecting more cash, and we are collecting it earlier. Let’s now turn to the European market where we are seeing growing supply with opportunities to win business at attractive returns. Cabot continues to deliver strong results even though charge-off rates for the unsecured debts in the UK remain near historic lows. Over the last year, though, the trend has been climbing and we expect charge-offs to increase substantially going forward. We believe the supply growth we are seeing in the debt purchasing market is being driven by a number of factors. Most importantly, much like in the U.S., indebtedness in the UK has increased to record levels. And as a result, we anticipate a significant rise in consumer default rates in the future. In addition, banks appear to be selling their accounts earlier after charge-off than they have historically. In the UK as well as in Continental Europe, we expect continuing regulatory and supervisory pressure to increasingly drive credit issuers toward a combination of more debt sales and a greater focus on credit management services. For example, the European Central Bank has ruled that banks across the European Union must provide for 100% of unsecured debts, 2 years after they become delinquent, beginning with all debts entering delinquency after April 2018. Therefore, banks will be increasingly incentivized to sell these assets to recognize value. We are also seeing a growing pipeline of servicing opportunities, particularly for BPO engagements as banks look to experienced servicers such as Cabot to outsource a more significant portion of their increasing credit management needs. Cabot is well positioned across the credit management spectrum of services to make the most of these growing market opportunities. Cabot is best known for its long-standing debt purchasing business and enjoys a massive scale advantage. Cabot manages significantly more financial services related ERC in the UK than its closest competitor within the peer group. Cabot’s debt collection agencies ranked number one for 73% of portfolio as measured by placement volume that we service for UK financial services institutions. Cabot is also the largest provider of collections-related business process outsourcing services to the top financial institutions in the UK BPO contracts are particularly valuable as they lead to long-term relationships between Cabot and its clients. Cabot’s leadership in these areas is made possible through a common set of foundational advantages. Over time, Cabot has built strong deep relationships with key financial institutions. Cabot leverages its scale to maintain leadership capabilities in employing technology and accumulating and analyzing data. In addition, Cabot has set the standard in the industry for regulatory compliance. The bottom line is, if you are a large issuer of credit in the UK, you are likely working with Cabot. Cabot again delivered strong financial and operational performance in the first quarter. Our deployments in Europe in the first quarter totaled $84 million and were concentrated largely in the United Kingdom. Collections in Q1 from our European debt purchasing business grew 6% in constant currency, compared to the first quarter a year ago, continuing a strong multi-year growth trend. European revenues adjusted by net allowances increased 11% in constant currency in Q1 compared to the first quarter of last year. Our European ERC grew to $3.7 billion and was up 11% in constant currency compared to the end of the first quarter a year ago. More specifically, CCM’s operating income grew 15% in Q1 compared to the same period a year ago. The acquisition of the remaining interest of Cabot has created the opportunity to explore additional synergies, including potential debt financing options. As you know, yesterday the CFPB issued a Notice of Proposed Rulemaking on debt collection. We have been eagerly waiting the next step in this process for a long time. You may recall that the bureau first announced its plan to issue new rules for our industry back in 2013. Establishing a consistent set of rules for our industry is a truly positive step. We look forward to the day when everyone in the industry is held to the same high standard and confusion and uncertainty around existing regulations will be removed. Importantly, we expect the new rules to make it easier to reach our consumers through email and text messages. This rulemaking effort should also enable us to better help consumers move themselves toward financial recovery. The CFPB has provided for a 90-day comment period from the date of publication in the federal register, so we can anticipate the comment period deadline to be late August 2019. While it is unclear how long the CFPB will take to evaluate the comments and issue a final rule, the CFPB did note that the effective date will be one year after the final rules are determined. With that, I’d like to hand the call over to Jon for a more detailed review of our financial results.

Thank you, Ashish. As Ashish mentioned in his opening remarks, we will be referring to our U.S. business going forward by its brand name, Midland Credit Management, or more simply, MCM. Total deployments totaled $262 million in the first quarter compared to $277 million in the first quarter of 2018. MCM deployed a total of $174 million in the U.S. during Q1, almost all of which represented fresh portfolios of charged-off credit card paper. This compares to $179 million of U.S. deployments in Q1 of 2018. European deployments totaled $84 million during the first quarter compared to $87 million in the same quarter a year ago. Global collections were $514 million in the first quarter, growing 5% when compared to $489 million a year ago and growing 8% in constant currency terms. MCM collections from our debt purchasing business in the U.S. grew 10% in Q1 to a record $330 million. Call center and digital collections for MCM were up 15% compared to Q1 of last year due to the benefits of our consumer-centric collections approach and improved productivity. We also reported strong collections performance in Europe in the first quarter, growing 6% in constant currency terms compared to the same period last year. Total revenues adjusted by net allowances were $347 million in the first quarter, growing 6% compared to $327 million in Q1 of 2018 and were up 10% in constant currency terms. In the U.S., MCM revenues adjusted by net allowances were $189 million in the first quarter, up 10% compared to the same quarter a year ago. In Europe, Q1 revenues adjusted by net allowances were $135 million and grew 11% in constant currency terms, primarily from the increase in collections, driven by our operational innovation. Our ERC was $7.3 billion at the end of March, up $199 million compared to the end of March 2018 and up 7% in constant currency terms. In the first quarter, we recorded GAAP earnings of $1.57 per share. After applying the adjustments and income tax effect, the result was $1.46 per fully diluted share and our non-GAAP economic EPS was also $1.46 per share. Our GAAP net income in the quarter was larger than our adjusted income, principally as a result of a favorable tax settlement related to a change in our tax accounting methodology, which was included in our GAAP results, but not in our adjusted results. We did not exclude any shares from the calculation of our economic EPS in the first quarter. With that, I’d like to turn it back over to Ashish.

Thank you, Jon. In summary, I am very pleased with Encore’s operational and financial performance in the first quarter and I am excited about our prospects. First, we reported record results in the first quarter. We set records for earnings, ERC, and global cash collections, the latter surpassing $0.5 billion for the first time. In the U.S., we reported record collections for MCM in the first quarter and call center and digital collections were up 15% compared to the first quarter a year ago. Secondly, looking ahead, consumer indebtedness in both the U.S. and UK has reached new record levels, a strong indication of future increases in charge-offs and supply growth in our 2 most important markets. As a result, the U.S. market remains large and favorable while credit issuers in the UK and Europe are looking to increasingly outsource or sell defaulted portfolios. Third, both MCM and Cabot are leading platforms in the core markets in the U.S. and the UK, which positions us well to capitalize on the increases in supply that we anticipate will happen in these markets. Fourth and finally, we are making solid progress in our journey to strengthen Encore’s competitive position. This includes a continued focus on improving the performance of our most important platforms in the U.S. and Europe, while at the same time, streamlining our business portfolio. These actions include the acquisition of the remaining interest in Cabot in July 2018 and the sale of our ownership interest in Refinancia in December 2018. As a result, we now own 100% of our largest and most strategic businesses and we expect our results to become more comparable from period to period and are reporting to be more simple going forward. Now, we would be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Thank you. [Operator Instructions] And our first question comes from Mark Hughes from SunTrust. Your line is now open.

Thank you for that. Good afternoon.

Hello Mark.

Any comment on collections through the quarter? Did the tax refund kind of delay have any impact on you? Did you see any slippage in April, for instance?

Well Mark we didn’t see any impact. Often on at times between a couple of weeks earlier in the quarter there were some delays and then they caught up, so nothing to note or anything of significance from the tax refund impact on the collections in the quarter.

Okay. And your expenses looked definitely good year-over-year. Were there any unusual items in there, or was this a function of greater efficiency? Wonder if you could just talk about the cost structure a little bit?

Yes. So good question on costs. There were no unusual items this quarter compared to the previous ones. We are just very focused on cost. Number one, we are focused on fixed and overhead costs and controlling them and managing them. And then in the operations, where the collections happen in each of our geographies and Cabot operations and in MCM, we are very focused on reducing and improving the cost to collect for each channel. So that’s the impact you see now between quarter-to-quarter or year-to-year as a mix of paper we buy, maybe different and the use of channels maybe different, so CTC gets impacted by that, but we are very focused on overall costs. And the one thing you will notice is, as we improve increase the share of digital and call center collections in the MCM business compared to legal, that impact on MCMs cost to collect has been showing for quite a while in a pretty steady way and we expect that to continue as we continue to push on digital collections and call center collections relative to other channels.

And then the new technologies that the CFPB does give you more flexibility around email and text messages, what could that mean for you?

Yes. So, the rules are about 24 hours old and we have had a lot of people go through all 538 odd pages and new technology is one of the 3 or 4 main focus areas of these proposed rules. So, we’re really excited and looking forward to the opportunities they open up to leverage email even more, use text messaging, and leave voicemails, for example, without some of the liabilities that come at times without these rules. So over time as the rules become final and they are still a while away, we expect they will start helping us more because we’ve been investing in our UK and U.S. businesses and platforms very aggressively and extensively in digital capabilities and we are ready to capitalize at a much larger scale because that it will become more available. Again, a little bit further out because there’s 90 days notice period, comment period. Then the CFPB will take the time to finalize rules and they will be in effect a year after that, but we’ll be preparing and really looking forward to it.

Thank you very much.

Thank you. And our next question comes from Eric Hagen from KBW. Your line is now open.

Hi thanks good afternoon guys. I’m hoping you can just discuss pricing on the domestic side a little bit. Just I think you noted that multiples you expect to increase. Can you just give us any sort of tangible guidance there, if you will? Yeah, I think that’s the bulk of the question. Thanks.

So, if you look at the industry cycles, stepping back several years and I’ve seen the cycle from both sides, on the issuer side and debt buying side or couple of cycles. So, it’s fairly dependent on supply and demand. So, in the great recession times, multiples really increased significantly. And then, given supply got reduced as banks pulled back on lending and charge-off rates declined, the multiples declined and they have ticked up over the last 3 years and but they have stabilized and pricing seems it’s long forward flows and few auctions that happen, but pricing seem stable kind of within plus or minus few percentage ranges of what we’ve been seeing over the last year or so after declining between 2015 and 2016 and 2016 to 2017. Multiples could increase significantly. I just cannot predict where they’ll go, but when supply/demand dynamic will change, I expect that to change over time and IRRs to improve as well on that front.

Okay. But pricing is generally kind of stable like you said, it’s not necessarily coming down in response to higher charge-off rates like you alluded to in your comments?

That is correct.

Okay.

And the industry is in a pretty stable condition in terms of the number of players who are buying, number of players who are selling and they are very comfortable selling. So, it’s a stable equilibrium, I would say. Banks find value in selling and we’re able to achieve good returns. But we are waiting for the credit cycle to at some point turn and the supply to spike up. And in the margin when those things happen that can cause changes in pricing and multiple of course.

And then switching over to Europe, I mean, I think in your prepared remarks you noted that you guys are expecting a significant rise in default rate. I guess, one of the ways I think about the business is, it’s sort of a double-edged sword in a way that weaker economic conditions could potentially put pressure on the ability to collect cash in IRRs and multiples. Can you discuss how we should think about that kind of trend just given your comments about Europe? Thank you.

So, I just want to make sure you are talking about Europe or U.S., I missed that?

Europe. I think your comments were around a significant rise in default rates in Europe.

Yes. So, I’ll start off and I will let Ken jump in, he’s on the phone from UK as well. In UK, we have long payment plans compared to U.S. and they are very resilient, in general. Now, of course, there’s some impact, but they are generally very resilient to financial situation that the consumers now face who are already in a difficult situation when they are paying off their debts. The bigger bank comes for our industry from the rise in charge-offs and delinquencies that create the supply/demand change that would improve supply but improve pricing for us significantly. So, I’m going to let Ken also jump in on the nuances and unique thing situation in Europe as well.

So, I think just in terms of the opportunity first, it’s slightly different in the UK than it is to the continent. In the UK, banks have been selling willingly and relatively early for some time. They are still selling more and there’s still growth in the market despite the fact that we’re at record level default rates. But what we’re looking forward to in the UK driven by almost record levels of unsecured debt is increasing defaults over the next few years. Relative charge-off rates in the UK are significantly below those in the U.S. and are at long term low levels. So, we expect supply in the UK industry to come from increasing default rates in the future. On the continent, it’s less clear that that’s going to be the case, but certainly very clear that there’s a lot more for banks to sell, because proportionately they sell a lot less of what they are able to sell and they are increasingly selling not just backlogs, but also fresh debt, because of some of the regulatory news that’s hit the industry from the European Central Bank. So, all of the banks are waking up. If they are not already selling debt, they are waking up to the fact that they will be recognizing potential losses by having or not being able to recognize value rather from arrears that are already 2 years into non-performing status if they don’t act and prepare themselves to sell some of their debt. So, I think we’re seeing 2 different factors. In the UK, default rates will rise and, on the continent, banks will increasingly sell the debt that they have to sell.

Very, very clear on the supply impact in Europe. But I just want to make sure I’m clear that the ability to collect cash really won’t be you’re not expecting any sort of headwinds in the ability to collect cash because of weaker macro conditions over there?

Yes. It’s a very good question and one that’s occupied us for some considerable time as we’ve been pondering the potential impacts of Brexit specifically to the UK market. We’ve been doing a lot of modeling in that regard. And so, the way I would describe it is that we have an incredibly robust book. Ashish was mentioning the fact that we have a lot of payers, we have about 800,000 payers of relatively small amounts, GBP12 to GBP25 or $30 a month. So, these are not credit cards or loans that are paying $100 or more or $500 more per month, they are low payments paid by a lot of customers. When you look back to the previous crisis, so back from 2006, 2008 where unemployment doubled in the UK, we saw literally no impact on our back book from that economic uncertain impact. And so, we’re relatively confident that our payer books are going to behave relatively well. The other part of what we collect is from settlements. Now settlements were more severely impacted back in the previous crisis, but our settlement percentages at the moment are very much lower than they used to be. So instead of collecting over 30% of collections from settlements, we now collect less than 20%. And so, the impact on settlements in a Brexit scenario, in a severe no deal Brexit scenario would be fairly limited. So we’re pretty confident that the impact in a no deal Brexit scenario on our ERC would be in the very low single digit percentages and the positives from the opportunities where we could buy at better rates, we’d get greater servicing revenue in from higher defaults would outweigh those negatives.

Great that’s helpful color, thank you so much.

Thank you. [Operator Instructions] And our next question comes from Brian Hogan from William Blair. Your line is now open.

Yes thank you and good afternoon.

Hi Brian.

First question is actually on the operating efficiency. And you’ve talked about it a little bit earlier, but I was just trying to get a handle of and I appreciate the commentary being on business mix shift and not your efforts to going to digital and improving your efficiencies. But I guess what is your target? What can it get to? And with that, are you still realizing synergies from the acquisitions of Cabot and what have you? Or just kind of some color where the operating efficiency you can get to because year-over-year improvement in the purchasing business was like 210 basis points in the efficiency ratio there and making a really nice improvement there? So just some color there, please.

I would say there is couple of things going on, right. So one is, as I said, repeating something that we are very focused on fixed cost structure, so looking at that, continuing to focus on that. The second one is, as you grow collections, there’s a scale effect, right. So, when you look at the CTC ratio, there’s a scale advantage you get. And then we are also improving in various channels the cost to cost to collect channel. In legal, for example, we are we use outsourcing firms in MCM in the U.S., but we are also growing our internal litigation network which we’ve had for years and we’re seeing very good success. And there we have advantages of scale and back office and so forth and technology that can be leveraged across more states. So that we are starting to see. And then the one that was obvious and I said earlier is the shift to, in the U.S., to call center and digital much more than legal, for example, is having an impact. Now all of that said, the things could change with the mix of accounts. If you buy more lower balance accounts, there are more front-loaded costs in capacity and so forth. So, all of that is driving the efficiency improvement in these metrics. I don’t think I can provide a target number. What I can say is, all the actions we are taking which is keeping our eye on the fixed costs and continuing to improve them, reduce them, making sure each channel is as efficient as possible and then the result is the CTC you see, because of different mix of portfolios. In Europe, for example, we could be buying more at in some quarters paying portfolios, those have very low CTC versus the non-paying which have a higher CTC. So those effects get compounded and show up kind of over time. But we are very focused on reducing the overall costs and the scale effect. In terms of synergies, there are some synergies you can imagine, but because the businesses are in 2 different continents and multiple countries in Europe, those are somewhat limited in terms of platforms and so forth. But we are starting to clearly see some opportunities in using same technologies, same vendors and so forth and getting those would be included in the reduction in fixed cost that I mentioned earlier.

Sure. And I guess one more on that subject here is, how much of the improvement, I guess, has been from your scale in that versus just to focus on operational improvement from your fixed cost basis?

I don’t have a yes, I mean, it’s difficult question when you look at our global cost to collect number, right. It’s a reflection of mix purchasing, our purchasing mix across the 2 businesses MCM and Cabot. Within MCM, there is clearly a scale effect. So, if you grow collections 10% or so, you see a scale effect of the fixed cost, but we continue to grow call center digital at a higher rate. It grew 15%. So, you could do some math there. But I don’t have exact pie chart if you would or proportions of which of these factors are driving improvements. All of those actually are in fact impacting the CTC improvement.

Sure. I know the CFPB, obviously the technology should definitely be a benefit, but possibly offsetting that maybe, I don’t know, love to hear your thoughts would be the limitations on the number of days of contact 7 and a 7-day period. What is, your initial views on its impact on your back book and obviously with just going forward on that limitation, but on your underwriting, but what are your initial thoughts?

Yes, that’s a pretty major change in the proposed rules. And we’ve been thinking about it for quite a while actually not just for the last 24 hours when the rules came out. The advance notice came out and then there was another interim set of proposals couple of years ago. So, we have had opportunity to think about this problem for a while, but not knowing what the exact rule was going to come out to, we haven’t implemented changes So here’s a few examples I would give you. Given the nature of our business has turned more to fresh and a consumer centric call model, we’ve been very focused on reducing the dialing intensity which is was an old way of doing things. And of course, you have to dial, but people have cell phones much more. You don’t want to dial multiple times because you were trying to find them when they are at home. Now they have the phone with them. A couple of years ago, we gave some metrics in one of our earnings calls. We had indicated kind of a project we did in which we reduced the dialing volume by 2/3 for the U.S. business, MCM business and without losing any without having any negative impact on total right party contacts. So that give you an example hopefully gives you a color on use of data, using better phone numbers, dialing more strategically, thinking about when to dial, which number to dial, and just pure analytics and innovation and operational excellence helping reduce the dialing there. Now, those are the kind of things we’ll be thinking at a much more accelerated in a much more accelerated manner to figure out how best to address this call cap, the 7 calls over 7 period cap issue that might come. That is negated in many ways by the positives in the rules which are opportunity to email, text, leave voicemails in a much more-safe way, and on a larger scale. And those are the technologies we actually use in U.S. a bit, but much more in our global operations. There’s a lot we can learn from Cabot on that on the U.S. side in other operations, because texting is much more common in other parts of the world. And we can leverage those learnings and best practices very quickly into the MCM business. So, I’m quite excited about the opportunity to continue the digital push that we already have been doing to counter any of the negative impact that might come from the call caps. Again, as we get smarter and who to dial, when to dial and how often to dial, we’ll be analyzing that impact. So, I don’t have a clear answer in terms of what’s the impact on back book. I would expect the net benefit of all of these rules feels like a positive to me. Given we’ve been on this journey of providing better documentation, information to consumers, we have all that already figured out and we just need to adapt a little bit more to what the new rules ask compared to the industry which has not had to do that as we had to do that for our consent order.

Sure. Yes. On the service definitely, I agree with you. I guess, one quick follow-up on that subject. Do you have like the average number of times you actually call a person in a 7 day window today? Is it more than 7, just to kind of get a sense there?

No, we don’t have it. It depends, as you can imagine, a lot on the stage of the account we buy. We have very different strategies for different stages of the account when we purchase it in the first month or for several months and what do we do later. So, that would be a very broad number that would not mean anything. We also have multiple accounts for a consumer often, so there is lots of different nuances as we look to solve this thing that will become active as a rule in a year or year and a half or so.

Sure. Turning for – to growth, I mean, one last follow-up after this, but turning to growth for the year, obviously, you’ve got operational improvement for your efficiency, your strong purchases, your interest savings, tax rate impacts, I guess, what is a good number to think about for the year going forward? I mean, you’ve got some nice growth this quarter and going forward, what kind of numbers should we be thinking about from a growth perspective?

So, we normally do not give guidance on growth. We only give it in a rare situation. Last year, we gave when there were lot of unusual things happening on taxes and so forth last year. So, what I can say for sure is our market is – in U.S. is pretty steady and stable. Pricing is favorable. As I have – we have indicated in the past, as we shift our capital allocation for purchasing to be a little bit more towards U.S. versus other geographies, so we expect to deploy in the U.S. somewhat more than what we deployed last year, again, it depends on the opportunities that come by. We expect to deploy less in Europe than we did last year and we expect to keep improving and stay focused on the cost efficiency side. All of those things should help continue drive an improving performance, but I do not have and we are not going to give guidance in terms of percent on the earnings front.

Sure. And I guess last one, effective tax rate for the year, some color on what that should be?

Still – what I said last quarter is still mid-to-low-20s and actually if you back out the one-time adjustment for the current quarter, you get to 23% for the current quarter. So, it’s low-20s

Alright, thank you.

Yes.

Thank you. And our next question comes from Dominick Gabriele from Oppenheimer. Your line is now open.

Great. Thanks. I just wanted to follow up on 1 or 2 things from the CFPB. If we just think about that number of calls and maybe the technology that might need to go in as you have to monitor how many times you’ve called each of these people for the various products, can you just talk about if that’s something you’re already doing or is there a build-out that’s necessary? Is there any incremental costs that could come to fruition because of some of these new rules? Thanks.

Yes, Dominick, thanks for the question. Let me answer that question at 2 levels. So, the first one is a pretty simple answer. Yes, we do monitor that and we’ve been doing that for years. So, those are – that’s one of the metrics in call center operations, we keep a track off in multiple ways that you can imagine. So, no issues in being able to monitor that and adhere to the regulatory requirements that will become effective. And that should be no extra cost. Let me address the cost question broadly as I think you alluded to in your second part of your question, so, we just had 24 hours to kind of digest these rules and we will be focusing a lot more on them as you can imagine. But just looking at them at this point, we have become really good and experienced and it’s business as usual to incorporate new rules in our business starting with large change in consent order, but also we have a large team that’s interpreting rules and driving improvements and implementing them on our systems on an ongoing basis, because the state laws keep changing in different states. So – and then there is innovation that drives analytics, digital, technology and other things. So, we have a pretty good ability and a large team focused on implementing changes on a regular basis. Reading the rules and the team has read it, I’ve actually gone through them quite a bit myself, have a full printout on my desk. I don’t expect there to be any extra costs in implementing these rules. Those are fully embedded in our business. Over time, we will see how the enablement of email, text, and actually leaving voicemail is now more easy – how that will improve right party connect rates and perhaps it even has an improvement in cost to collect at some point. I don’t want to predict that yet, but in terms of implementation, I don’t expect any extra expenses at this point of my estimation.

Excellent, I mean, it does seem to have a lot of positives to it in the fact of the last – the digital capabilities that now you can reach out to these folks in particular. And when you think about the time-barred debt and the fact that, I guess, there’s going to be some cap or you can’t sue for this debt any longer potentially, how does that affect the industry? I’m just not as familiar with this particular piece of charged-off debt? Thanks.

Yes, so time-barred debt is a notion when the statute limitations for proceeding with legal process has expired. The debt may still be owed and people may still want to pay it on their own to get it out of the bureau, for example, or whatever it might be. Those are some things we’ve been doing for several years now because of a consent order. And for rest of the industry, it is going to be a change that they will have to find a way to adapt, because there are different ways the time can be extended and whatnot. So, you need to be very careful and diligent in implementing those rules. I believe, again, we haven’t read every line as detail. I believe we are pretty much in compliance with this area. I would think are 100% in compliance, because that’s the language that’s pretty much been borrowed from our consent order. So – and that rest of the industry should be scrambling and spending a lot of time and energy to figure that out.

Excellent. You guys obviously started the year off really strong, really good quarter, and – especially on the efficiencies from what we were expecting. Can you just talk about perhaps is this a new level of your expenses as a percent of collections for the year or do you expect them to kind of pop back up just a little bit? Thanks so much.

Again, as I said earlier, I don’t want to give guidance on a specific metric for rest of the year. The metric can bounce around for a bunch of reasons. One is, as I said, the mix shift of what you buy and whatnot, because if you buy certain, let’s say, lower balance accounts and they have some legal spend, which is front-loaded on a per account basis. The other one is, the first quarter is generally higher collections quarter and – because of tax refund issue. And just if your expenses are much more stable, steady and you have a higher quarter – collections quarter, you can imagine the CTC goes down disproportionately compared to other quarters. So, that’s a trend I can tell you for sure happens on a pretty regular basis without considering any other impact that may be happening, purchase mix and whatever it entails and legal, for example, in the past we’ve had. So, I’d be careful about looking at every year and trying to predict, but, for sure, Q1 is the strongest quarter from a collections point of view relative to other quarters. Yes.

Great, thanks. And just lastly, if I may, can you just talk about – you had talked about that you are having better processes in place to kind of bring some of these collections forward in your prepared remarks, this seems like a real positive. Could you just go through some of the finer details that are enabling you to collect your outstanding collections sooner? Thanks so much.

It’s a combination of a bunch of things. So, a few years ago, we embarked on a journey to radically improve again the charts we showed were for U.S., for MCM. There we launched into a whole range of programs starting with the very consumer focused call model that we adapted from the Atlantic Credit & Finance acquisition in 2014. We have now leveraged it across broader MCM business and even other businesses. Secondly, improving our litigation processes, making sure that data and everything is available, which has actually become more and more available from the issuers. So, you can proceed with actions in a timely manner, setting up payment plans, reaching more consumers through finding better phone numbers and through again digital channels as well. So, I cannot pinpoint. All I can say for sure is the combination of all of these operational programs and the team, MCM team is maniacally focused on improving the payer rate and the overall liquidation rate. So, they are looking at overall value and bringing money earlier. So, at times you see it in money multiple, at times you don’t, because it’s sooner, but the IRRs are better in that case.

Perfect. Thanks for taking my questions.

Thanks, Dominick.

Thank you. [Operator Instructions] And our next question comes from Robert Dodd from Raymond James. Your line is now open.

Hi, guys. I’m just kind of sticking with the CFPB for a moment, I mean, obviously you mentioned, I mean, the electronic options could really enhance the ability to make the first contact. What – there’s not just the max 7 contacts per 7 day period, but I think there’s one in there as well. But if you’re successful in getting hold of them, if it doesn’t get anyway, you can’t try again for another 7 days. How would you say that balance, I mean, what proportion, if you can answer this, of your initial contacts to someone when you get hold of them the first time are they responsive versus say hang up? And would a 7 day waiting period for you have any kind of material impact on making that first contact?

So, Robert, appreciate the question. You went – kind of you really have spent time reading these regs. Really good question, went way down into the details on this, so these are kind of things that analysts and the legal team would be looking at a lot in detail. I can’t give you a number because there’s no one answer. It depends on if it’s in the early stage when we may have assigned accounts to an account manager or using a dialer, so, there’s lots of different ways. One thing I can say for sure that, the call cap is dialing out. There are other remedies, not remedies, other ways, as I said, text and email, but also the voicemail is something that people don’t use it that extensively given the litigation, kind of contradictory rulings out there, the Foti case and whatnot. The rules will make it much more easy to leave voicemails as a way to actually reach consumers. And therefore, if you can do that in a very safe way because of the clear Safe Harbor there, you don’t have to dial that often. So, all of these things we will be considering in designing the calling approach, the voicemail approach, the script for that, how to supplement with other ways to reach the consumer. For example, more and more people are using cellphones now as you know. So, you don’t have to do the traditional dial then if you can safely leave a text message and bring the whole regulatory regime into the 21st century. It’s going to get easier to contact consumers and these consumers want to be contacted in many cases and resolve their debts. You just don’t want to do it too often using only one way. And I think overall it becomes easier. We just have to dig into the details and figure out how this impact strategies of contacting consumers at each stage of their kind of lifecycle, if you would.

Got it, got it. Appreciate that color. Thank you. The other question I have, if I can, on revenue recognition rate versus NFL, I mean, it showed a pretty robust bounce from Q4 to Q1, up almost 200 basis points, looks like mostly that was in Europe. Is that a function of essentially what you were showing in the slides, your collections are outperforming expectations and you are revising up yields meaningfully or is there some other dynamic going on there, because that was a pretty healthy pop this quarter?

Hi, Robert, it’s Jon. In revenue recognition, you tend to get a – the big driver is our collections, right, and we’re collecting better, which leads to improvements in IRRs. We’re buying better stuff as improve – as IRRs are improving, right. So, I would – there’s always some noise in revenue recognition as it bounces around, there is some seasonality with this too, I will point out, but the trend has to be positive in that regard.

Got it. I appreciate that. Thank you.

Thank you. And we have another follow-up question from Mark Hughes from SunTrust. Your line is now open.

Yes, thank you. I’m curious on the other income, the fee-based businesses, the year-over-year was down a little bit consequentially. What is the driver there and what are the prospects in coming quarters?

Mark, so the other income is primarily servicing fees and servicing revenues in our servicing businesses, which is – and the largest of that is Wescot as part of Cabot, although Cabot has servicing businesses in Ireland and Spain and so forth as well and then other smaller geographies, we have some of that as well. So, couple of factors. Wescot is doing really well and growing its – keeping its DCA, which is agency business table, but really growing the BPO business, which shows up in fees. Couple of factors would have caused that to come down. First is, we sold Refinancia management company in December. So, a year-ago quarter included some of those revenues. The other one is currency effect. So, there’s a negative currency effect from compared to a year ago for European revenues, in general. So, those 2 factors would – it’s about a 7% currency effect as I look at my notes. So, both those factors are driving the other revenue down Q-over-Q.

And what was the Refinancia impact, if you have that?

It’s pretty small, it’s about $1.5 million or $1.6 million something like that for Refinancia. The currency effect is much larger for European servicing revenues.

Understood. Thank you.

Yes, sure.

Thank you. And I’m not showing any further questions at this time. I’d now like to turn the call back to Ashish Masih for any further remarks.

That concludes the call for today. Thanks for taking the time to join us and we look forward to providing our second quarter 2019 results in August. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This conclude today’s program. You may all disconnect. Everyone have a great day.