Bruce Thomas - Vice President of Investor Relations Kenneth Vecchione - Chief Executive Officer, President and Director Jonathan Clark - Chief Financial Officer, Executive Vice President and Treasurer Ashish Masih - Executive Vice President, US Debt Purchasing and Operations.
David Scharf - JMP Securities Sameer Gokhale - Janney Montgomery Robert Napoli - William Blair Mark Hughes - SunTrust Robinson Humphrey Dain Haukos - Piper Jaffray.
Good day, ladies and gentlemen, and welcome to the Encore Capital Group Q1 2015 Quarterly Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Bruce Thomas, Vice President of Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, and welcome to Encore Capital Group's First Quarter 2015 Earnings Call. With me on the call today, are Ken Vecchione, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President, Chief Financial Officer and Ashish Masih, Executive Vice President, US Debt Purchasing and Operations.
Ken and Jon will make prepared remarks today, and then we'll be happy to take your questions. Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the first quarter of 2015 and the first quarter of 2014.
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 release, which was filed on Form 8-K earlier today.
As a reminder, this conference call will also be made available for replay on the Investors section of our website, where we'll also post our prepared remarks following the conclusion of this call. With that, let me turn the call over to Ken Vecchione, our President and Chief Executive Officer..
Thank you, Bruce, and good afternoon. I appreciate everyone joining us today. This afternoon, we posted our first quarter 2015 financial results and we are pleased with our performance. We established new records for total collections, revenues, adjusted EBITDA and non-GAAP economic EPS.
Most importantly, we delivered these results, while the US debt market remains challenging. The success in the quarter highlights two important initiatives within the company.
First, our consumer-focused programs under the banner Connect With the Consumer, over the last seven quarters have gained traction and have improved liquidation while maintaining a positive consumer experience. And second, the contribution of our international businesses to collections, revenues and earnings continues to grow. Turning to our results.
Encore’s first quarter GAAP EPS rose to $1.08 per share compared to $0.82 per share in the first quarter of 2014, an increase of 32%. Excluding one-time items and convertible non-cash interest, non-GAAP economic EPS reached a record $1.23 per share compared to $1.08 per share an increase of 14% from the first quarter of 2014.
GAAP net income for the quarter was $29 million, and adjusted income grew 13% to $32 million compared to the same quarter last year. This quarter, our earnings were negatively impacted by $0.04 from the stronger dollar on a year-over-year basis. Cash collections increased 7% to a record $425 million.
Adjusted EBITDA, one of the most important measures of underlying performance grew to a record $266 million; an increase of 7%. On a trailing 12 month basis, adjusted EBITDA grew 18% to $1 billion compared to $860 million a year ago.
Our overall cost to collect this quarter was 38.8%, up from 37.7% a year ago as we rebalance our call center capacity after our acquisition of Atlantic Credit and Finance in the third quarter of 2014 and as we continue to invest more in our legal channel to produce additional MPV return per account.
Our estimated remaining collections or ERC at March 31, was approximately $5.1 billion, an increase of 7% or $322 million compared to the end of the first quarter of 2014. Our collections growth in the quarter was driven impart by improved liquidation in our call centers and on our legal collections channel.
I mentioned a moment ago, that we are making good progress on two major ongoing initiatives. And the first of those initiatives I’d like to discuss involves our Connect With the Consumer program.
For many years, Encore leveraged a strong analytical approach to achieve success in the debt buying market with a database containing over 50 million unique adult consumers and 70 million accounts in the United States, Encore used historical performance and deep analysis to gain a decided edge in our markets.
Starting in 2013, we began to implement our Connect With the Consumer programs designed to improve customer contact and experience while simultaneously improving liquidation. This quarter, total collections grew year-over-year and linked quarter reflecting the rollout of these programs.
At Encore’s Investor Day last year, we showed a slide that reflected our early progress and eventually delivering what we called an – goal of 50% liquidation improvement by 2016. We are now focused on continue to identifying areas of potential improvement.
We are transforming our call center approach as we’ve changed how our account managers interact with consumers in different and more effective ways. We’ve also changed the way we’ve managed our legal channel, modifying the way we manage inventory and establishing new ways of applying data analysis.
I’d like to take a moment to refresh your memory on this chart we showed you at last year’s Investor Day. Year one performance of 2012 vintage when compared to year one performance of the 2009 vintage was 31% higher and the target we shared at that point was year one performance for the 2016 vintage of 50% higher than the 2009 vintage.
Our record level of collections in the first quarter is evident that we are delivering improved results that stem from our consumer-focused programs. In creating these programs, we look to establish a mutually constructive dialogue with our consumers.
Our goal is to establish in connection with them in which they have an opportunity to resolve their debt and regain their own economic empowerment. Consequently, we achieved improved customer satisfaction as measured by lower number of complaints.
We are making progress on all of these aspects of our programs and it is resulting in increased liquidation rates. After implementing these programs, the passage of time allows us to examine the ongoing impact of the consumer-focused approach.
The $31 improvement in liquidation after collecting on 2012’s vintage paper for one year became a $63 improvement in liquidation after collecting for two years. We believe we can continue this trend. These initiatives are designed to continuously improve ongoing liquidation in the future.
We will provide a broader overview of these initiatives on Investor Day. The other driver of our collections performance in Q1 was the growth of our international business.
Over the past two years, we have put capital to work in order to diversify our business, expand our footprint and provide Encore with the optionality when we make capital allocation decisions. Establishing leadership positions in markets outside the United States has been a primary goal of Encore’s overall growth strategy.
In Q1, our collections from our international business grew 29% compared to last year reflecting the critical mass that our geographic expansion has achieved. Strong collections performance leads to strong cash flows. In the first quarter, we generated a record $266 million of adjusted EBITDA, an increase of 7% over the first quarter of 2014.
Adjusted EBITDA is one of the most important ways that we measure our company’s operating performance. It helps us determine the amounts available for future purchases, capital expenditures, debt service and taxes and it gives investors a clear picture of the strong cash flow generated by our business.
On a trailing 12 month basis, adjusted EBITDA grew 18% to over $1 billion. Increasing cash collections creates several important advantages. We are now able to generate more earnings from each invested dollar in our core business. We can be more selective in our deployed capital.
We can continue to bid to acceptable corporate hurdle rates as pricing remains elevated in the US. These advantages have provided us with increased optionality in our core business. We’ve reduced our debt somewhat over the past two years.
Our collections over the same time period continue to grow and we have seen reductions in debt leverage with our debt-to-adjusted EBITDA ratio declining from 3.04 times to 2.65 times on a trailing 12 month basis. Although the trend is favorable and we pay close attention to our leverage.
We are also constantly looking for additional opportunities to deploy capital at or above our hurdle rates, which may impact our debt level and our leverage from time-to-time. Cabot delivered strong performance in the first quarter as revenues grew 28% year-over-year assisted by the purchase of Marlin in February 2014.
Cabot generated nearly $100 million of collections reflecting more than 20% growth over the first quarter of 2014. Cabot’s economic EPS contribution to Encore’s results rose to $0.28 this quarter as they continue to enhance their collections through Marlin’s capabilities on non-performing paper.
We acquired Atlantic Credit and Finance to augment our domestic debt buying business. Atlantic provides us with greater collection and deployment opportunity in the high balance fresh paper channel. This is proven to be extremely important as the majority of charge-off receivables sold in the market today are fresh portfolios.
Atlantic’s platform enables us to competitively bid on and purchase fresh paper forward flow opportunities. With that, I’ll turn it over to Jon who will go through the financial results in more detail.
Jon?.
Thank you, Ken. 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 Cabot, Grove and Refinancia's results in our financial statements. Where indicated, we will adjust the numbers to account for non-controlling interest.
In total, we deployed $179 million in the first quarter, of that total, we purchased $125 million of credit card receivables including $99 million in the US, $22 million in Europe and $5 million in Latin America, an additional $54 million was deployed by Propel for tax liens.
As Ken mentioned earlier, our increased liquidation rates have enabled us to be more selective in our deployments which is reflected in our purchasing activity.
Our ability to deploy capital at solid returns in multiple markets allows us to allocate capital to the areas with the highest returns and insulates us from the pricing and volume volatility that reliance on one market can cause. Ken covered some of the information about our first quarter collections during his remarks.
Collections in our domestic business in the first quarter were up slightly compared to the same quarter a year ago. In Latin America, collections grew 28% in the first quarter compared to Q1 of 2014.
For the quarter, our call centers contributed 45% of total collections, increasing to $190 million compared to 47% of total collections or $188 million in the same quarter a year ago.
Legal channel collections accounted for 42% of total collections and grew to $177 million in the first quarter, compared to $159 million and 40% of collections a year ago.. In the past, as we have transitioned accounts away from collection agencies and onto our own platform, the portion of collections from agencies has declined.
However, in the first quarter of this year, agency collections increased from 13% to 14% of total collections, primarily as a result of gross growth in the UK with business employees, agencies or collections.
Revenue in the quarter was $286 million, an increase of 13% over the $254 million in the first quarter of 2014 and was a ninth consecutive quarter of revenue growth for Encore. Revenues in the United States were $190 million in the first quarter, up 4% compared to $183 million last year.
In Europe, revenues were $87 million, up 39% compared to $63 million a year ago. In Latin America, revenues were $8 million and were up 1% compared to last year. Our revenue recognition rate excluding the effects of allowance reversals were 61.5% compared to 59.1% in the first quarter of 2014.
For the quarter, we had $3 million of allowance reversals, equal to the $3 million of allowance reversals in the first quarter of 2014. We had no portfolio allowances in the quarter. As many of your know, once we have evidence of sustained overperformance in a pool we will increase that pool in field.
Consistent with this practice and as a result of continued over performance, we increased yields in the first quarter primarily in the 2009 through 2013 vintages. Turning to cost-to-collect, excluding acquisition-related and other one-time costs, our overall cost-to-collect for the first quarter was 38.8%.
Breaking the overall cost-to-collect into its components, Cabot's cost-to-collect in the quarter was lower than our overall cost-to-collect. Cabot's portfolio includes many consumers who are already on payment plans and historically involves very little litigation. Marlin has marginally increased Cabot’s cost-to-collect due to its litigation focus.
As more of Cabot's accounts are serviced through Marlin’s legal channel, we expect to see incremental net collections and a higher overall return. Within our U.S. business, direct cost per dollar collected in our call centers was 7.7% in first quarter compared to 6.2% last year.
Direct cost per dollar collected in the domestic legal channel was 35.9% an 80 basis point improvement from 36.7% in the first quarter of 2014. While cost-to-collect is an important metric. We don’t focus on it in isolation. Overall, success in our business is driven by generating the greatest net return per dollar invested.
In some instances, it makes sense to spend more to collect more. Our legal channel in the United States which includes both legal outsourcing and our internal legal operations generated $159 million in first quarter collections growing 5% compared to $151 million a year ago.
Our legal outsourcing channel in the US collected $130 million in the first quarter, up 8% over the $120 million collected in Q1 of 2014. This increase was a result of our decision to invest more heavily in legal collection opportunities.
Cost-to-collect for the legal outsourcing channel was 35.3% representing an 80 basis point improvement over the 36.1% cost-to-collect in Q1 of 2014. Our internal legal channel in the US collected $29 million in the first quarter at a cost-to-collect of $38.4% representing a 50 basis point improvement over the 38.9% cost-to-collect in Q1 of 2014.
Even though we expect that our internal legal cost-to-collect will continue to improve over time, as we place more volume in this channel, it’s important to understand that our primary financial goal is to maximize the net present value of each collection opportunity.
I’d also like to reiterate that our long-stated preference is to work with our consumers to negotiate a mutually acceptable payment plan tailored to their personal financial situation.
These plans almost always involves substantial discounts from what the consumer owes, we not only believe that this is the right thing to do for our consumers, but the right thing to do for our business.
For Encore, legal action is always the last resort and it’s pursued only after numerous attempts to communicate with and reach an acceptable agreement with the consumer. Our Estimated Remaining Collections, or ERC, at the end of the first quarter was $5.1 billion, an increase of 7% over last year but was down compared to a quarter ago.
This decrease resulted from the combination of strong collections in Q1 coupled with lower deployments in the quarter as we exercise restrain, choosing not to buy portfolios that fail to satisfy our hurdle rates.
We believe that our ERC, which reflects the value of portfolios that we have already acquired, is conservatively stated, because of our cautious approach to setting initial curves and our practice of only increasing future expectations after a sustained period of over-performance.
In the first quarter, Cabot contributed just under $7 million of income to Encore's Q1 results, which equates to $0.28 of economic earnings per share because we own our interest in Cabot together with our partner JC Flowers.
Cabot's contribution to Encore's profit is calculated by backing out JC Flowers' interest and managements' interests along with the preferred equity certificates attributable to Encore, which eliminate in consolidation.
From a financing standpoint, Cabot recently amended their senior revolving credit facility, increasing its size to 195 million pounds. For Encore as a whole, there were certain one-time and non-cash items that affected our results this quarter.
$0.06 was related to the non-cash interest and issuance costs associated with our convertible notes and $0.05 were related to one-time acquisition integration and restructuring costs. After these adjustments, we end up with $1.19 per fully diluted share, and $1.23 on a non-GAAP economic basis.
In calculating our EPS on a non-GAAP economic basis, we exclude those shares associated with our convertible debt that are reflected in our EPS denominator from an accounting perspective, but which will not be issued, as a result of the call spread we entered into at the time we issued the convert.
For the first quarter, we excluded approximately 900,000 shares from the calculation as a result of the call spread. With that, I'd like to turn it back over to Ken. .
Thanks, Jon. I mentioned on our last call that we are in discussions with the CFPB. We continue to have a fluid ongoing dialogue with them. However, in essence, there is nothing new to report at this time. I would like to remind you that there are more issues that we agree upon than we disagree upon regarding consumer protection.
However, we continue to believe strongly that the CFPB’s ongoing rule-making process provides the most appropriate method of driving change and ensuring a level-playing field across the industry. I know it is likely that you’ll have questions for us about the CFPB. But at this time, we simply have nothing new to report.
In summary, the Encore team delivered new records for cash collections, revenue, cash flows and economic EPS. We continue to make progress on our consumer-focused programs connecting with our consumers and increasing liquidations. Now we’d be happy to answer any questions you may have.
Operator, would you please open up the line?.
[Operator Instructions] Our first question comes from the line of David Scharf with JMP Securities. Your line is open. .
Yes, thank you for taking my questions. Maybe as a start, just focusing here in the US for a moment. Certainly appreciated your comments about how challenging the supply and purchasing environment is here.
The magnitude of capital deployed though, I mean, was considerably less than even recent quarters when to our understanding the same sort of environment existed.
Is there anything in your mind changed in just the last three months as you assess the opportunities for the core credit card charge-off market here?.
Yes, thanks, David for the question. Let me kind of give you a broad overview of it. First in Q1, we saw steady volume. There was no surprise in volume, but pricing remains elevated.
And what we tried to do this quarter and even in Q4, as pricing remains at an elevated level, especially inside of the fresh market, which dominates most of the purchase spend, I think about 75% of what was offered was in the fresh market.
The fresh market pricing since the mid last year, has risen somewhere between 10% and 25% depending on the type of product you are buying. Right, what we try to do, what we’ve seen, is we have seen aggressive buyers who are placing more value on volume than over returns.
So we have tried several times to moderate that rise in pricing with our bids and we’ve lost volume. And what we think is unattractive returns. So what we do is, we have – we are capital allocaters. And we have the opportunity to tape what we were going to invest in the US card business and we just shifted over to Propel.
So Propel did $53 million this quarter in deployment and we saw better returns there than we saw what we see in the US business. Okay, I will say this, with these programs ever putting in place, the consumer focus programs, we could bid on this way, what we are trying to do is create a little more moderation in the rise in price.
But we have the opportunity to move our money whether it be to Propel, whether it be to Cabot or grow the Refinancia. We have an opportunity to have our dollar if you will search out the best out the best returns and that’s what we did. .
That’s very helpful and as we think about the returns in the Propel business where you allocated more than usual.
I know in the past, there has been a little bit of fee compression, there is always a little bit of price competition as it direct to consumer marketed business, can you give us a little color on some of the trends there?.
Yes, so, we saw more opportunity in this quarter to deploy money which was good. There is still pressure – pricing pressure in the Texas market. Although there has been some consolidation in the Texas market and some competitors have fallen away.
But we still like the returns there and in this past quarter, we thought the returns in Propel were greater on the margin than some of the returns in the US market. .
Got it. Okay, I’ll get back in line. Thank you. .
Okay. Thanks. .
Thank you. Our next question comes from the line of Sameer Gokhale with Janney Capital Markets. Your line is open. .
Hi, thank you. Just my first question was about can you reference to the improvement in liquidation rates? And I was wondering, where gas prices, lower gas prices played into that. Where you able to disaggregate the impact of lower gas prices from the improvement that you might have generated from changes to your collections practices.
I just was curious about that. .
We are not able to be that scientific. It’s very difficult to separate the meat out of the meat sauce here. What I can say is the lower gas prices definitely help, tax season, definitely helps.
But we’ve also put in a number of consumer-focused programs and changed the way we talk to our consumers and the way we try to negotiate payments with our consumers that have had a very big uptick for us as well. And it’s really hard to manage all those things as independent variables.
What I can tell you is collectively, we are seeing a rise in our liquidation rates and at the end of the day, everything helps. .
Okay.
And, in a different note, one of your competitors during today on their earnings call referenced the fact that, they are also in discussions with the CFPB, I know you don’t want to tell a lot about that, but did it say that they were in the sense reading the – and trying to gauge what kind of changes they could make that would appease the CFPB and to the extent that changes came along, really correctly there would be a minimal impact on their business going forward.
From your perspective, if you can just talk to where you might be in that same process? If you’ve already feel that you implemented a bunch of changes, reeling the peeling with yourselves, how far along are you in that process, so do you feel if there is a lot more to be done there?.
That’s good question. Let me start-off with a little bit more of a holistic answer and get a little bit more finite and answer your question. As I said, our conversation is fluid and we work to arrive at a mutually agreeable solution with the CFPB. What we are trying to do is balance a number of constituencies which are in Poland.
What’s best for our customers, what’s best for our shareholders, the relationships we have with our issuers are important and their regulators and the bureau. Now, when you break it down, there are two parts to the negotiations with the CFPB. The first is on the go-forward part, right.
And it’s very obvious that the CFPB clearly intends to drive regulation and increase consumer protection in the financial services industry. To that goal, there are more issues that we agree upon than we disagree. And also to me and everyone on the call, that before the CFPB ever came into existence, we had the bill of rights.
And what that bill of rights did for us was increase the level of compliance programs. And how we deal with the consumers and how we deal with the issuers.
So as I said, we see a lot of things similarly with the bureau, we were ahead of some of the issues that they are already talking to us about, all right? I will say that the issuers themselves through their regulators are prompting changes.
And some of the changes that both the issuers are making are and the bureau are things that we have already done before. But having said that, I am going to stop just short of saying we’ve captured everything, because these are fluid conversations and I can’t make that statement with a 100% certainty.
But, what I can say is, we continue to improve compliance. We continue to improve those things that will help the consumers engage with us an I think along those lines, we see a lot of things the same way as the bureau.
But, if I could urge the bureau to do one thing, it would be to publish their rule-making and place the entire industry on the same even level-playing field and that’s what we doing with which is, we don’t want to be disadvantaged by any agreement we may enter into with the bureau that others may not have to enter into.
So, that’s sort of the go-forward piece of the bureau if you will and how we are dealing with them.
And just to finish it off, or just a few other thoughts I have on that, as it relates to the settlement piece, I would say that the CFPB has taken certain positions with respect to the interpretation of existing legal requirements and their retroactive application of these rules.
And what we are trying to do is balance the retroactive application of the future rule-making and agreeing to a reasonable settlement is where we have a difference of opinion with the bureau. So, want to give you a little bit more context and how our conversations are going and I’ll be a little bit more specific to your question.
I hope that answers your question. .
That was very helpful and comprehensive. I appreciate that and just the last quick question, you talked about your purchases in the US and the competitiveness of the market, yesterday, - in our opinion had very strong purchasing volumes in the US.
It seems like in Q2 maybe that Europe is going to be a bigger focus area, so then should we expect as there maybe focus more on Europe in Q2 that you will focus more on the US market in Q1, so that you are not both competing the market at the same time for the same portfolio.
Is that a reasonable assumption?.
No, I don’t think so. .
Okay. .
I just think, we will go wherever the deals are. First let me say that, we just did just shy of $100 million of non-BK purchases in the US. But again, add the other $53 million in from Propel that brings us up to $153 million and you can add a few million dollars more in there for Grove of $4 million.
So we had a $157 million quarter in what we’ll call the Americas. That’s not a bad quarter by the way. All right, and it comes on the heels of some strong quarters that we had in Q2 2014 and Q3 2014 as well. As it relates to the UK, we are seeing a stronger pipeline in the UK.
We did about $20 million in purchases in the first quarter which we knew that was going to be a little quite, but if we are seeing the pipeline begin to develop very nicely, for Q2 and beyond for the UK..
Great. Okay, thank you very much. .
You are welcome. .
Thank you. Our next question comes from the line of Bob Napoli with William Blair. Your line is open. .
Thank you and good afternoon. .
Good afternoon. .
Ken, I guess, I’d like to understand, the retroactive application, essentially it would be the, I just to try to understand the definition here is to making of a rule and then applying that rule as if it existed in the past and even though, it didn’t exist in the past you have treated it if it did and then you pay a penalty because you did – is that, and is that what that means?.
Yes, I think, you pretty much got the concept of that. Maybe the best way, maybe an example I’ll give you, not an working example, but an example I use for our board is, Bob, let’s say you drive to work everyday and the speed limit is 65 and you travel at 60 because you want to drive safely and obey all the laws.
Imagine someone came to you and said, over the last three years we think the speed limit should have been 50 and now we want to fine you for going over the speed limit. That’s the way I kind of think about it. That’s the way I kind of explain it to my board. .
Has there ever been a case, I mean, are there cases in – that you are aware of regulatory-wise, or that has been the case and it just doesn’t sound, I get a fair way – but I mean, are there examples of that in the past?.
So, we are on the border line of how much I can talk about. And I am not answering your question respectfully. I think you need to do some research on that on the answer the question yourselves. Sorry, I can’t. .
Okay. Thank you.
Then, the – I guess, is there anything you can say about the large sellers that have been out of the market? Any further update and anymore confident that those large sellers maybe coming back to the market in the near term?.
Yes, so, this past quarter, I spent a lot of time on the road visiting with most of the issuers and I’ll say that the two large issuers that everyone refers to, I think one of the two will come back this year, but that one will only come back at the very, very, very end of the year.
Even though, both issuers have spent a lot of time increasing their issuer audits and getting ready. I don’t think they are going to come back to the market. Certainly, one is not coming back this year and the other I think is coming back at the tail-end of this year. .
Okay.
And then, within the Europe, are you looking, you made a purchase outside of the UK last quarter, I mean, are you looking to purchase more broadly in Europe currently or do you feel like you need platforms outside of the UK in order to get more broad in Europe?.
Yes, so, good question.
Little bit of what we are going to talk about on Investor Day, so, I’d say, say in the TV business, I’ll give you the cheese, but, our concept is looking for countries where we can buy a very strong platform that has very, very robust sales and then grow from that point of view, rather than to go into many countries simultaneously.
To give you a little bit of an example of that, in 2014 full year, Cabot purchased $357 million, okay, in one country. Introm purchased $293 million in a variety of countries, - did about $480 million in a variety of countries and Arrow did about $240 million. So, we like going into one market and then we like growing in that market.
Having said that, we did move into Spain through growth and we had a nice large purchase we did and that purchase is performing at or above expectation and we are looking at other countries, but I think we are going to look at it from a point of view of going into one country at a time finding the country that we like the platform and that country needs to have good organic growth available to us and it got to be available and platform consolidation or roll-up has also got to be available to us.
.
Okay. Last question, Latin America, you bought a healthy amount of paper in Latin America in the fourth quarter.
How is that paper performing and how do you feel about that the opportunities in that market?.
Okay, so we are going to spend a little more time on that on Investor Day, but on that portfolio, it is – at this point exceeding our expectations. .
Okay, great. Thank you very much. .
Thank you, Bob..
Thank you. [Operator Instructions] Our next question comes from the line of Mark Hughes with SunTrust. Your line is open. .
Thank you. Good afternoon. .
Hello Mark. .
Ken, your point about the – you are not a 100% there, but you’ve captured just about everything.
Is that to say that the issues that seem to be important to the CFPB you are already on board or are you already doing those things and it’s just this retroactive issuer that I think you mentioned last quarter as well the retroactive application that seems to be a sticking point.
Is that a fair characterization?.
Yes. Very difficult for me to answer on the falling, I mean, that’s really negotiating with the CFPB over the falling here. I am not going to do that, but there is a flow between what it’s going to be prospectively and retroactively and we talk to them about that and we have opinions on how to look at the rules and again, we agree on a lot.
Where we have the most disagreement is looking backwards. How they want to apply future rules. .
So the rules themselves, you are almost 100% there, it’s whether the applicability to prior years or prior portfolios whether that’s going to apply, that’s the issue?.
Well, I’ll say this, they still have not published the rules. I think they’ve put their questions out in October of 2013. We are sitting here today. I don’t have a sense or any visibility as to when they are going to publish their rules and so, I am not going to make any affirmative statements that future rules won’t impact us.
I want to see what their rules are and then we’ll deal with them. But the improvement to compliance is an ongoing process here at the company. And when we see things, we hear things, we talk to issuers, we evolve.
I can’t say that we’ve covered everything, but we continue to evolve and if you recall, last quarter, we showed a chart on exactly how much money we are spending on compliance and what these rules have done or what the future rules will do, they will favor those people that have very large market share.
The medium to small players are going to have a difficult time we believe keeping up with the changes in rules going forward. .
What do you understand to be the consequence of not reaching a settlement?.
As we’ve said last quarter, we’ll either reach a settlement although be it litigation, that – it’s very binary. .
And if there is litigation, what would that mean in terms of your ability to function to continue to buy in the market.
What’s the impact of that?.
We think we’d be able to conduct business as we are conducting it today. .
Why the – and I am sorry if you mentioned this, but the legal outsourcing increased in the quarter more so than the internal legal and it’s cheaper, but why did you favor that over the internal legal – if there is any other reason other than the expense?.
So, part of it happens to be that, during 2014, we bought several businesses that have a bigger legal book and when you bring them over, they were doing mostly legal outsourcing versus the internal legal. That’s one and we continue to build up or build out internal legal platform. .
Why is the - another of the large player taking steps to audit and do that sort of thing, but not coming back this year, what’s their thought process?.
This quarter has been, in general, very active audit quarter for us. Last year, we had 14 issuer audits. In the first quarter we had eight. All right, and what’s happening with some of the players that are coming back in, they are getting ready.
And we saw this was other players, they come in, they audit, they go back and either have conversations with their regulators or conversations with their own risk committees. There are other questions that are asked and they come in do another round or a third round.
So this is all part of they are doing their due diligence to understand where the market has moved to since they’ve been last participated in the market and we welcome that and we have said to them we will help you n any way we possibly can to get you comfortable not only what we are doing but where the market is going, and we spend a lot of time educating them as well.
So, we think it’s a good sign that you are preparing to come back to the market. .
And you think this is part of a sort of a longer-term strategy.
They do the audits and then they sit and think about it?.
They have to go through several – this is my viewpoint. I think they have to go through several clearing points on their side as well. And they’ve got to get comfortable on their side. This has been really a issuer issue not so much a debt buyers’ problem.
So they’ve got to go through their own internal processes to get comfortable on when they are going to come back to the market. We’d welcome them to come back tomorrow. I just don’t think they are ready to do so yet. .
Let’s say a little tongue and cheek that maybe when the credit losses start to move up, that will accelerate the process, but that’s my editorializing not yours..
Okay. .
Thank you. .
Thank you. .
Thank you. Our next question comes from the line of Dain Haukos with Piper Jaffray. Your line is open. .
Hi, it’s Dain on for Mike Grondahl. Thanks for taking my question.
I was just curious, can you help us think about operating margins over the rest of 2015 kind of as you continue to get more used to all the recent acquisitions and where you think you can find synergies?.
We’ve talked a little bit about that inside and we think and I should have made this point to one of the earlier questions.
One of the reasons why we didn’t chase after any volume is that, we see a lot of opportunity to continue to invest back into the company in existing and even older vintages in way that’s helpful to the consumer and also improved liquidation. And we see a better return on a – basis than to actually buying sometimes new portfolios.
And we will probably continue to do that all throughout 2015. In addition, Cabot has also come to that same conclusion and will be investing more in their legal channels as they put part of the Cabot back book to the Marlin platform which we mentioned previously before.
So, I think our cost structure in the company will fall out of the MPV approach that we are taking. .
Okay, that’s helpful. And then, Kind of on purchases I think in the last – at the last Investor Day, you had said, combined the whole company, we like $1.2 billion to $1.4 billion of deployments in 2015.
Is that still a good number even with the US issuer is not coming back to the market or maybe won’t potentially at the end of the year and as it just the buckets within that will change, so you’ll maybe have more exposure to Latin America and Europe versus maybe US?.
I’d say, I welcome you come to our first week of June Investor Day. We are going to talk about that and kind of give you some highlights as to how we are going to deploy money throughout the rest of the year. And I’ll just say, stay tuned, but we’ve got a variety of different ways to achieve our results in 2015 that we are working on. .
Okay, that’s helpful.
And then, just one other question, if you could talk a little bit about, are you seeing, are you continuing to see consolidation within the US market? And how are the smaller debt purchaser is going to hand the CFPB if there is a retroacted application of future rules? How will that apply to those companies?.
So, really the US market breaks down into three segments. The top tier where the two largest players are generally 90% of the market. Then there is the mid-tier players, there are couple of them three or so, and then it drops off very quickly after that.
There has been a fair amount of consolidation over the last couple of years and we’ve been the person who has been consolidating.
The small players that are left, they tend to reach out and talk to us and try to do one-off negotiated deals and as I’ve said all the time, whether it be just in the States or around the world, we are working on three to five deals at any time.
I’ll tell you that the expectation from a sellers’ point of view on pricing is far greater than our expectation as a buyer. And, I don’t see deals getting done in the near-term because of that bid ask spread.
However, we probably have a different viewpoint and in our calculus of how we look at portfolios, we have a sense of where we think the bureau is going where we think the cost of compliance is, versus where some of the smaller shops are.
And I think those smaller shops are going to be in force to price when the compliance expense is going to begin to wretch it up. It’s not going to be a gentle slope on to the right, it’s going to be a big step variable for them.
And I think a little bit these guys are getting squeezed out already as the large issuers come around and do their issuer audits.
I got to tell you, we had one in here the other day, I think they are into the three or four straight days, the amount of time and effort and manpower we put against it which by the way we’ve done well on all these issue audits. I just want to make that statement we’ve done really, really well on all the issue audits.
But I can’t see a small firm putting that time and effort or will be able to fund that time and effort, it’s probably a better way of saying it. .
Okay, and then is that step-function on the compliance expenses is that when those rules are eventually published?.
I think so, and I think, it may even start before that as they go through the issue audits with the large issuers and they say these are the things that we want and these are the things we are demanding. .
Okay, that’s very helpful. Thanks, I can get back in the queue. .
Thanks. .
Thank you. Our next question comes from the line of David Scharf with JMP Securities Your line is open. .
Yes, thank you.
Just a follow-up, can you remind me what the cost, I mean, roughly what the call center headcount of Atlantic was when you acquired it and how that compare to the number of seats that the rest of the business has?.
We were - probably Atlantic was somewhere between 110 and 130 when we acquired.
We’ve raised it to 160 and what we’ve also done is take our same cloud call center and converted – if you want it, the easiest way to think about is we converted the same cloud call center as a branch of Atlantic using the Atlantic model for collecting fresh paper and dealing with the consumers. All right.
All in, we have about 1500, maybe a little less than that, account managers in the company, 1450 to 1500 account managers at this time for the Midland business, for the US business. .
Got it. I apologize it’s a bit of a loaded question, but what I am wondering is, given that the sellers themselves have pretty much forced the migration of this market into almost all fresh not allowing buyers to turnaround and resell paper. Encore’s core competency was always aids to recall resell paper.
Do you feel like the number of seats at Atlantic as well as which you’ve converted at same cloud, just from the standpoint of collector training, focus competency, are you aware you need to be – to be more active in the fresh markets?.
So, insightful question. I feel pretty comfortable where we are today and where we are going. Before we even bought Atlantic, we created some new programs cleverly named Fresh Express as a way of titling it, branding it inside the company, where we started down the Atlantic path well before we bought Atlantic.
We rolled it out in the US and we’ve rolled it out deeper into India and we continue to roll it out deeper into India. But I want to remind you that, we have 70 million accounts. We have 50 million consumers. A lot of that is seasoned paper as well. So, we can handle both fresh and more seasoned paper.
And if you think about it in terms of an oil analogy, the oil market, the older accounts are like fracking, all right and what we are doing is, we are learning both from Cabot and we are learning from Atlantic on how to go after and deal – and increase liquidation with our more seasoned paper.
And we find that to be very helpful rather than using the tried and true methodology that serves Encore well for many, many years. .
Got it. Okay, that’s very helpful. Thank you. .
Thanks David. .
Thank you. Our next question comes from the line of Bob Napoli with William Blair. Your line is open. .
Thank you.
I just wondered if you guys could give a little color on what under – what the direction of CFPB is going as far as what types of regulatory changes they are focusing on what you are doing different than you were before going through this review with the CFPB?.
The best way to answer the question is to look the rules that they questions they published. And those questions were around – and even you can even look at, say the OCC portion as well, but they all head around the same direction, reasonable basis to collect, okay. How you deal with consumers, how you deal with complaints and disputes.
How you deal with media and what you present to the consumer. Those are a lot of the general questions. How do you collect from a consumer and also pay attention to all the consumer protection laws and regulations.
Those are all the things that – if I had to summarize in a general sense what the rules and what the OCC brought in was all aiming at and Bob, that’s how I’ll sort of – I think I’ll leave the question – leave the answer for you on that..
And you feel like that you are doing the things that they are – the direction they are going, you feel like you have the majority of that in place and you feel like it’s manageable?.
As we sit here today, as we see what’s happening..
Right. .
As we progress, I think that’s a fair comment that we think we are in good shape.
Not knowing what the final rules are, who knows that there is going to be a little drag in our earnings, but I’ll tell you what, going forward, we’ve always been able to figure out ways to grow through these things and there are always challenges that we face in every one of our markets. .
Okay. And then….
What we want – the same rules for everyone else, the rules are the same. We should – we’ll do well. .
Okay. And then last question on, you said Grove about $4 million in the US.
So are you using Grove as a platform to move into the bankruptcy business in the US? Or how do you feel about bankruptcy?.
If I said Grove, I said that was – I was mistaken, I meant Refinancia. .
Okay. I mean, any thoughts on the US bankruptcy business, you guys have been inactive in it for quite sometime.
Is there any – I mean, it’s a tough market right now, I understand with the OCC regulations, but are there any – do you have any thoughts around that business just no interest in it?.
No we are coming, we are going to be back in it. We are preparing for it. There really hasn’t been a lot of business out there in the BK and I think a lot of people are on hold a little bit with the OCC bolt-in. But, we do $100 million of collections in BK a year through our portfolio purchases.
We just don’t necessarily go out and buy specific BK portfolios. .
Okay.
And then any credit products, you mentioned credit products from time-to-time any updated thoughts on credit products?.
I think, June 4th is….
I thought you say it, sounds good..
You want us to do the whole presentation now Bob? Everyone is looking forward to the trip to New York. .
Yes, thank you very much..
It’s my pleasure. .
Take care. .
All right..
Thank you. I would now like to turn the call back to management for any further remarks. .
Well, this is a good way of finishing up, which is thanks for taking time joining us today. We look forward to seeing many of you on our – at our 9th Annual Investor Day. June 4th is the Wednesday night dinner and then the 5th is the presentation. So we look forward to seeing you there and engaging with you even further on some of these questions.
Thank you everyone. .
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day..